Tech bubble fears are overblown

Talk of a mega-cap technology bubble continues to do the rounds, but are such fears overblown?

Yes, says JP Morgan, which says a basket of the magnificent seven stocks – Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta, and Tesla – is not especially expensive.

Soaring earnings means the group’s forward price-earnings ratio is actually lower than its five-year average. Goldman Sachs agrees, saying that at the height of the dotcom bubble, the seven largest tech stocks were more than twice as expensive as today’s aforementioned big seven.

Tech stock fundamentals today are also much stronger, adds Goldman.

These are fair points, although there are two caveats. Firstly, while today’s tech valuations appear perfectly defensible, the same was true of financial stocks before the global financial crash. Surging earnings meant valuations looked reasonable, but a credit bubble meant bank revenues were not sustainable. Today, Nvidia’s incredible gains look justified due to soaring earnings, but there are question marks about the sustainability of its growth.

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Secondly, is it still helpful to talk about the magnificent seven’s characteristics, given their increasing divergence? Tesla and Apple shares have tumbled in 2024, down 34 and 7 per cent respectively. Google parent Alphabet is cheaper than the S&P 500 and shares are below where they were in late 2021. In contrast, Nvidia and Facebook parent Meta have soared, gaining some 80 and 40 per cent respectively in 2024. With the magnificent seven moving in different directions, talk of a mega-cap tech bubble is clearly misplaced.

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