The "safety card" during the banking storm, the U.S. technology stocks are now "too expensive"?
Will the safest deal in the crisis become the most dangerous bet?![]()
The optimism that the Federal Reserve will pivot away from its most aggressive interest-rate hiking cycle in four decades has pushed the S&P 500 Information Technology Index up 19% in 2023. Traders believe that the Fed is close to ending its rate hikes and pushing S&P 500 tech stocks to their best first quarter since 1998. However, this belief is not guaranteed, and it has been suggested that the current valuations are not in line with longer-term growth prospects.
Valuation Model Suggests the Euphoria Has Gone Too Far
Tech stocks in the S&P 500 are trading at almost 25 times prospective earnings. To justify such a multiple, the Fed would need to cut rates by at least 300 basis points, which is five times more than what the swaps market is pricing in for rate cuts this year. Quincy Krosby, Chief Global Strategist at LPL Financial argues that the sector's growth prospects are attractive but not at the current valuations.
![The "safety card" during the banking storm, the U.S. technology stocks are now "too expensive"?](https://ussnsimg.moomoo.com/feed_image/70042948/0be2b619ab613cf2ab51643fc9cc9794.png/bigmoo)
Bleak Earnings Outlook for Tech Companies Supports the Skepticism
There is an expected 15% slump in the sector's first-quarter profits, as predicted by analysts. This decline is the third-largest among the S&P 500's 11 industry groups, and supports the skepticism around the tech rally.
![The "safety card" during the banking storm, the U.S. technology stocks are now "too expensive"?](https://ussnsimg.moomoo.com/feed_image/70042948/a8e5fb2053793b44a415a28c940aad12.png/bigmoo)
Options Traders and Strategists Agree that the Tech Rally Looks Unsustainable
Options traders are not as optimistic as equities investors, with the cost of protecting against a 10% decline in the Invesco QQQ Trust being 1.7 times more than the cost of options that profit from a 10% rally. JPMorgan Chase & Co. and Morgan Stanley also agree that the tech rally looks unsustainable.
History Says there May Still be Upside Left
During the past four rate-hiking cycles going back to the mid-1990s, tech stocks have posted an average annualized return of 21%. So far in this rate-hiking cycle, the S&P 500 Information Technology Index is up just 1% and is being beaten by several other sectors. Therefore, there may still be some upside left.
![The "safety card" during the banking storm, the U.S. technology stocks are now "too expensive"?](https://ussnsimg.moomoo.com/feed_image/70042948/6497829c5fdf37c08b032e0058a7631e.png/bigmoo)
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