SocGen’s Albert Edwards has some concerns going into 2024.
If you’re looking for rosy outlooks — glass half-full takes on the macro and markets — Albert isn’t your man.
If, however, you enjoy reveling in what could, but probably won’t, go wrong, Edwards is the guy to call.
In what I suppose counts as his 2024 year-ahead outlook, Albert warned on a prospective meltdown in US tech. That’s not a new concern for Edwards. In fact, it’s fair to call it a perennial talking point from one of the world’s most incorrigible macro bears. He reiterated it on Thursday.
“If 2022 was a bad year for tech, hit by the double whammy of missed earnings and rising bond yields, 2023 saw ChatGPT arrive on the scene and trigger a frenzy of FOMO that even a surge in bond yields above 5% failed to stop,” Edwards wrote. “So, 2024 begins with the US tech sector accounting for as much of the US broad market index as it did for a few months of madness in the summer of 2000.”
Do note: That’s Info Tech, proper noun. As in, the actual sector. Not all of the US mega-caps we colloquially call “tech” are in fact categorized as such. For Edwards, that “makes it all the more amazing that US tech stocks now comprise almost a third of US market capitalization.”
As usual, he reminded market participants that the valuation premium for US tech took off following Jerome Powell’s January 2019 pivot. At that juncture, the forward multiple for tech was around the same as that for the broader market. Currently, tech trades at 27x, around seven turns expensive versus the rest of the market.
Although Albert did acknowledge that tech is cheaper now compared to its own recent valuation peak, he cautioned that the current 7x premium “is as high as it ever has been, apart from the madness of the 2000 Nasdaq bubble.”
If you’re wondering whether Edwards is willing to grant that tech should trade at a premium, the answer is a qualified “yes.” “I understand all the arguments as to why the current conjuncture is sustainable. I even find some of them plausible,” he wrote, before suggesting he’s seen it all in four decades on the job, and as such, he’s skeptical of efforts to rationalize the possibly irrational.
“You know what? I’ve been doing this job for 40 years and I’ve heard it all before,” Albert went on. “If I had to warn of one seismic shock for 2024… it is not whether the US or China does or doesn’t go into recession or if inflation and interest rates are a bit higher or lower than expected, it is the US IT market cap bubble bursting and tipping the entire US market into a slump.”
Is that possible? Well, sure. The Nasdaq 100 is at a record high, after all. So, it’s certainly possible that “tech” (however you want to define it) could correct and de-rate. But if bond yields fall further, that’s a tailwind for multiples, and tech (or the mega-caps at least) have just proven their adeptness when it comes to cost-cutting, right-sizing and otherwise pivoting in the face of adversity.
Of course, if there’s a recession and it exposes “hidden” cyclicality, richly-valued equities could de-rate as long-term growth expectations are reappraised. And, in fairness to Albert, we do tend to mischaracterize terms like “tail risk” and “black swan.” If a majority of market participants preemptively identify a given risk, you can pretty much cross whatever that risk is off the list of potential destabilizers. It’s the risks no one identifies that cause market events. On that score, I suppose it’s worth allocating a small share of your worry bandwidth to stretched tech in all its various manifestations.
Have their been companies as dominant and had cashflows like mega cap tech companies in the last 40 years? As you’ve mentioned on too many occasions to count, mega cap is a long duration play with a call option on innovation. Given that, I’m much less concerned about the Nasdaq 100 due to how weighted it is toward the mega cap titans. It’s the small cap and non-public tech companies that are going to continue feeling the pinch of rates and dwindling cash piles.