Boom in US technology stocks: new bubble?

The advance of the technology stocks It doesn't seem to know any stops Wall Street. One of the symbolic companies of this moment is the American processor manufacturer Nvidiawhich managed to surpass the threshold of 3 trillion dollars in capitalisation as alone Apple and Microsoftnot surprisingly two other technology stocks, had managed to do so first.

“This market trend has stimulated the debate between investors and analysts: we are in the presence of a new tech bubble?”. This is the question he tries to answer Marco PiersimoniCo-Head Euro Multi Asset of Pictet Asset Management.

Factors to observe

“The answer is that, at the moment, there are no signs of it. In fact, despite the presence of high share valuations, these have reached even higher levels in the past. Furthermore, it can be observed today how the growth in prices of technology stocks both generally assisted by a correspondent, if not even more supported, increase in profits“, underlined the analyst.

Piersimoni points out that the first indicator to observe to understand if you are in the presence of a bubble, after all, is to understand whether there is an excess of valuation, which however is a necessary but not sufficient condition. In fact, alongside this it is necessary to evaluate whether future earnings projections are realistic And if investors become irrational resorting to excessive leverage and tolerating very high levels of risk.

If we lower these assumptions into the current market context, we note that, in the United States, the rratio between price and earnings is close to 21 timesa value that is widely placed above average of the last ten years.

The Nvidia case

The concrete case of Nvidia is further illustrative. In the last year the its share price increased threefold, however in the face of profits that multiplied by five times. This resulted in the price-to-earnings ratio falling, incorporating a 15% de-rating. Therefore, investors are buying Nvidia shares at one most convenient valuation compared to what they could do a year ago.

By looking at the ratings of Oraclea company still in business, which was able to overcome the dot com crisisbetween 1999 and 2000, this saw increase its stock price fivefoldwhile the useful – despite growing by 60% – they did not advance at the same rate, causing the price-to-earnings ratio to triple. It follows that, while in 2000 the market was betting on a growth in profits which in reality did not find confirmation, today the growth of technology stocks occurs at a slower pace than the advance of profits and, paradoxically, the latter have become less expensive.

The conclusions

“Then there are further elements which are not in line with what one would expect to see in the presence of a speculative bubble. For example, the net inflows into the stock market they should be at high levels and instead they remain around zero“, recalls the Pictet Asset Management analyst.

“As an operational indication, we can therefore conclude that from an overall examination of the stock markets they do not emerge in a clear manner i signs of a speculative bubbleas it was in 2000, 2007 and partly also in 2021. It is therefore correct investing on the stock markets as long as you have a adequate investment horizon, necessary to dispose of the inevitable volatility of the stock markets. A valid alternative is to use flexible investment strategies who manage exposure to the various markets by smoothing their volatility”, concludes Piersimoni.