Albert Edwards is worried about tech. Still. Albert Edwards is still worried about tech.
I don’t think Albert’s ever seen an equity market he liked, but the resurrection of dot-com-style tech dominance makes this market particularly off-putting for SocGen’s most famous employee.
“I never thought we would get back to the point where the value of the US tech sector once again comprised an incredible one third of the US equity market,” Edwards said Thursday. (And here I thought nothing could surprise Albert).
The figure below is familiar, but do take a moment to note that it shows actual Tech — that is, the formal sector, not “tech” in the colloquial sense that we typically refer to America’s mighty mega-caps.
“This high has been reached with only three of the ‘Magnificent 7’ stocks actually being in the tech sector,” Albert remarked.
Is that perilous? As ever, it’s hard to know. Certainly, you can make a fundamental argument in favor of tech and/or mega-cap outperformance versus other sectors and/or the so-called “S&P 493.” As Edwards conceded, “the rise in S&P 500 forward earnings is entirely driven by tech stocks.”
Of course, estimates are one thing. Results are another. And it’s not so much about whether America’s most valuable Tech (and “tech,” lower-case, with scare quotes) companies will continue to be going concerns as it is whether they’ll live up to expectations, where that means meet analysts’ growth forecasts. Markets being “efficient,” those forecasts are in the price (in the multiple).
“The upward trajectory of trailing IT earnings does not seem to match the steeper rise of forward earning expectations,” Edwards said, addressing the key point of contention.
The figure above makes Albert’s case. As he put it, “so far, US IT companies are not delivering at the pace that expectations of profits are rising.” That disparity, he went on, “poses a risk.”
Kudos to Edwards for showing restraint. Typically, mismatches like the one illustrated above don’t “pose a risk” in Albert Edwards notes. Rather, foreboding disparities are land mines, sinkholes, death traps and ambuscades.
Indeed, Albert’s Thursday missive was perhaps most notable for the general lack of hyperbole and embellishment, or at least when set against the (very) high bar he sets for himself in that regard.
Tech, he calmly warned, “commands a high premium compared to the market overall,” but “the problem that skeptical investors have now, as they did in 1999, is that selling, or underweighting US tech, can destroy performance if one exits too early.”
I feel like this is a moment in time where active managers and folks who construct portfolios are losing faith, some may call it capitulation. If you have been buying in to the “market broadening” narrative, you have drastically underperformed for over a year, and you’re sick of it!
Makes me think now is the time to buy mid/small cap’s and the S&P 493. Time to lay a bet and get some of that dopamine H spoke about last December.
The last sentence sums it right up. Quite a number of respected value-oriented managers lost their jobs and/or many of their clients for getting out too early in 1999-2000.
Cue up Chuck Prince in 2008: “But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
Yep, we’re still dancing now as well. How knows for how much longer?
I suspect the near term top will be when NVDA reports on 2/21. Depending on the guidance they provide, it is likely to result in some profit-taking, sell the news event. I still believe the FED will start the rate cuts in March because Treasury is already paying a $trillion in interest expense. I guess President Xi is helping a bit by exporting some deflation to help limit goods inflation here.
So barbell it. Hold as much tech and quasi-tech as you need to not fall too badly behind the S&P 500, assuming that’s your benchmark, and build positions in groups that are undervalued, basing or positively inflecting, and overlooked. With short rates set to ease and economic growth holding up well, but investors still agog over tech, there’s opportunities – well, not galore, but enough.
I went back and looked more closely at, and thought harder about, the chart of trailing vs forward EPS.
It seems to me that when earnings growth is accelerating out of a trough, the forward EPS curve will always be above the trailing EPS curve, and when earnings growth is decelerating after a peak, the reverse will always be true. The more rapid the acceleration or deceleration, the larger the gap between the curves.
If so, then the curves are implying that tech earnings growth is accelerating out of a trough. Well, that is correct, the trough was 2H22-1H23 more or less.
The curves are also implying it will be a rapid acceleration. That is to be seen.
Basically, the chart seems directionally reasonable to me, although the implied magnitude might be too large or small.