The Warning Signs of an Impending Collapse for Big Tech

Are Big Tech Stocks at the End of Their Run?

For years, tech stocks have dominated the financial markets, but the pressing question now is whether they can maintain their leading position or if we will witness a scaling back of their economic and financial power.

According to BCA Research, there is a surprising similarity between today’s market conditions and those that led to the collapse of the Nifty Fifty in the 1970s.
Capital Group does not fear a dot-com bubble burst but anticipates that valuations will decline from current levels.
Furthermore, Goldman Sachs is bracing for potential turbulence, highlighting signs that Big Tech could be on the verge of a downturn.

In this article, we will explore the risk factors that may jeopardize the bullish trend of Big Tech companies and the indicators that could trigger a market correction.

The High Valuations of Big Tech

This year, the lofty valuations of Big Tech stocks have compelled many analysts to rebalance their investment portfolios.
The “Magnificent Seven” (Apple, Amazon, Alphabet, Meta, Nvidia, and Tesla) are currently trading at around 30 times their expected earnings.

BCA Research compares the growth trajectory of tech stocks to that of famed companies like Coca-Cola, IBM, and Xerox, collectively known as the Nifty Fifty.
Between 1970 and 1973, these companies delivered annualized returns of 64% but plummeted over 60% from 1973 to 1974.
Analysts are wary of the parallels between the investment mania surrounding a select group of stocks and the current frenzy about AI leaders like Nvidia.
While not a mirror image of the Nifty Fifty phenomenon, the hype around these stocks is an ominous sign of a potential downturn.

Will the Tech Rally Continue?

Capital Group believes that while a collapse for Big Tech is unlikely, they face valuation risks and other business challenges that may increasingly favor a sector rotation towards industrial stocks and utilities.
Their analysis emphasizes that the high valuations of the Magnificent Seven are bolstered by strong earnings growth but are also vulnerable to regulatory risks and the evolving landscape of AI trends.

Indicators of a Potential Downturn

The signals that Big Tech might be on the verge of a drop may not be immediately obvious, but various economic indicators are ringing alarm bells for analysts.
According to Goldman Sachs, overvalued stock valuations, a flat yield curve, robust manufacturing activity, and excessive private sector spending historically precede market downturns.
They have collated these risks into a composite index that assesses the likelihood of an imminent crash, currently sitting above 70%, a level that has often indicated approaching financial turmoil.

Goldman Sachs warns that slowing growth and central bank policies aimed at curbing inflation could compress these companies’ margins, triggering a swift drop in stock prices.

Historically, an indicator surpassing 70% coincides with significant declines in S&P 500 listed stocks within the following year.

Ultimately, when the indicator exceeds 70%, average expected returns typically fall; presently, future returns are projected at around 5%.

Disclaimer

The information and considerations contained in this article should not be used as the sole or primary basis for investment decisions.
Readers retain full freedom in their investment choices and assume complete responsibility for those decisions.
The content is provided for informational purposes and does not constitute or should not be considered an offer or solicitation for public savings.