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Vanguard Says US Tech 'Euphoria' Can Break One or Two Ways

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Bloomberg Jun 19 18:23 · 47.6k Views

Joe Davis, chief economist and global head of investment strategy at Vanguard, says the valuation gap between tech and other stocks will narrow in the coming years. "I think we can see some modest deceleration in the tech sector, at some point it has to come," Davis says on Bloomberg Television. "But if the economy holds up, I think other parts of the market could catch up and I think that would be good news."

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  • 00:00 We've done research to say what how transformative could AI be and I think it has the prospect to be more transformative in the personal computer.
  • 00:08 That does not mean however, and that's for the next several years.
  • 00:10 That does not mean, however, that markets are not overvalued.
  • 00:12 I think, I think the US equity market, it's, it's an uneven story.
  • 00:16 I mean, you have the technology sector that continues to run away
  • 00:19 yet that sort of,
  • 00:21 I would, I would label it euphoria is not broad based.
  • 00:24 And so it can break one or two ways.
  • 00:26 I think we can see some modest deceleration in tech sector at some point that has to come.
  • 00:30 But if the economy holds up, I think the other parts of the market could catch up.
  • 00:34 And I think that would be good news for the market.
  • 00:36 But Joe, do you think we're in a bubble then?
  • 00:38 I would be reluctant to say that.
  • 00:40 I mean valuations in parts of the market are at
  • 00:44 near historic highs.
  • 00:46 So history would say that we have prospects for lower returns in those segments of the market.
  • 00:52 But as I said before, Francine, it's not broad based.
  • 00:54 You have small caps, not nearly as
  • 00:56 you know, euphoric in that sense as as part of the large cap names you've said it's not on value based companies.
  • 01:03 And so again, I think it's an uneven picture,
  • 01:05 but I, I, I'm concerned of the momentum going solely into technology.
  • 01:09 So what, what does that again, what does that shake out
  • 01:13 and are there adjacent I guess industries that could also
  • 01:16 you don't have a correction on the back of that?
  • 01:18 Well, history shows that two things will ultimately happen.
  • 01:21 It's just unknown what the timing is that with transformation, the very sector that benefits from the trans transformation still can become overvalued even though if it changes the economy.
  • 01:30 And so I think that's what we will see with, with the technology companies, they're already discounting phenomenal growth.
  • 01:36 And also what history shows is that gap between say technology companies and the rest of the market that will narrow
  • 01:42 in the coming years.
  • 01:43 But that's a
  • 01:44 that's an annual three or five year outlook, not a, not a six month plus.
  • 01:48 Joe, what's the right way of looking at a portfolio building Again?
  • 01:51 There's, you know, there's
  • 01:53 there's not that many catalysts, I guess for equities that are actually priced to perfection.
  • 01:58 Yeah.
  • 01:58 And yet
  • 01:59 the rally kind of continues.
  • 02:00 I think you have to look outside of where the greatest momentum is.
  • 02:03 And now it takes a longer multi year horizon.
  • 02:06 But but ultimately you're rewarded.
  • 02:08 I think you're being rewarded less
  • 02:10 for the technology sector despite its transformative ability.
  • 02:13 So that would say
  • 02:15 outside of
  • 02:16 the
  • 02:16 US
  • 02:17 And if you're in the US, don't forget all the parts of the market that may not have as much of the headlines, but have a greater cushion for future returns.
  • 02:25 So where because Europe is having wobbles.
  • 02:28 Yeah.
  • 02:28 Well, I would I would actually say you actually, I mean, this is it can get uncomfortable, but history shows you have to go where the discomfort is to benefit from what, you know, finance people call risk premium.
  • 02:38 So you go to actually parts of Europe, you go to, you go areas that have slower growth.
  • 02:43 And and for the
  • 02:44 US, I'm not picking on technology, but it's actually outside of technology that you don't want to make sure that you're under way too much
  • 02:52 because that introduces risk to the portfolio.