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Albert Edwards warns of a tech stock bubble amid high valuations.
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The tech sector is now 37% of the US stock market, surpassing the dot-com period peak.
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But rising bond yields will ultimately stop the rally, Edwards said.
Like the high market valuation ranges he warns about, Société Générale strategist Albert Edwards‘ bearish missives do not have a tendency to serve properly as near-term market timing instruments.
He acknowledges as much.
“An equity investor who heeded my words of caution on the US Tech ‘bubble’ will by now have taken to sticking pins in plasticine models of me,” Edwards wrote in an August 21 notice to shoppers. “Indeed, my ankle has been hurting for over six months and although the physio says it is tendonitis, I strongly suspect otherwise.”
But there’s no denying that Edwards, a stark contrarian amid the pervasively bullish angle on Wall Street these days, has some concerning observations about where the market sits — significantly with respect to tech shares, and in the context of authorities bond yields.
Building on his argument that the market is in a bubble, he highlighted in his newest notice that the tech sector now makes up 37% of the complete US market, which is increased than at the peak of the dot-com bubble in 2000. Over the last few years, buyers have piled into tech amid the frenzied pleasure about AI.
Another metric exhibiting that the tech sector has traditionally high valuations is a falling free money move yield. This means that present market costs are high relative to money move after bills as tech corporations dump money into AI development. The sector has a free money move yield of around two. This is also mirrored in the S&P 500’s low dividend yield of 1.2%.
Meanwhile, long-term authorities bond yields have surged at the same time as the tech rally, and offer just about risk-free yields of over 4%.
The ratio of 10-year Treasury yields to the market’s dividend yield has climbed to dot-com period ranges.
Historically, rising bond yields have weighed on stock valuations, but that hasn’t appeared to be the case so far in this market. Edwards says it’s only a matter of time until that adjustments.
“Only the other day, interest rates were rock bottom and equity bulls were telling us that sky high equity valuations were justified by TINA — There Is No Alternative,” he wrote. “But that TINA magic no longer works, now that interest rates are so much higher. So, how come the equity market is able to shrug off the relentless rise in long bond yields by feeding off news of strong profits from a handful of mega-cap tech stocks and the promise of more to come?”
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