Is the Nasdaq about to “crash”?
No. I suppose the answer depends on your definition of “crash,” but no.
Tech shares might correct, though. In fact, big-cap US tech was down ~4% in two sessions through noon on Thursday, as geopolitical jitters collided with a burgeoning momentum unwind to drag down consensus longs.
But a correction’s something different than a crash. Corrections happen all the time. Or at least they used to. Crashes (real ones) happen almost never.
One person who’s seen a few crashes in his day (and seen plenty more in his dreams) is SocGen’s Albert Edwards, who on Thursday speculated about a macro-market apocalypse, as he’s wont to do.
“As time marches on, there are few of us left who were in the industry during the 2000 Nasdaq crash let alone the 1987 crash,” he wrote. “I was there, and the one thing I have learnt is not to be complacent.”
I take his point, but… well, suffice to say that in the post-GFC world, central banks made complacency mandatory. It’s easy enough to carry on week after week about the necessity of remaining vigilant, it’s another thing to burn up other people’s money on insurance premiums.
For the better part of a decade, you had two choices: “Harvest the carry or run a risk of gradually going out of business by resisting,” as Deutsche Bank’s Aleksandar Kocic put it, half a dozen years ago. “Not much of a choice, really.”
Albert knows that, of course. “[A]ny equity investor positioned for what would be the first full-blown bear market since the 2008 Global Financial Crisis has been crushed between the jaws of the Fed put/pivots and the incredible price momentum in the US Tech sector,” he said Thursday. The figure below gives you some context for that momentum.
Info Tech now comprises a ridiculous 35% of index market cap. As Albert’s always keen to point out, only three of the vaunted “Magnificent 7” names are technically classified as tech stocks, which makes the 35% figure all the more remarkable.
Edwards is suspicious of the euphoria, even as he conceded that earnings growth for the market leadership might justify at least some of the premium.
But forward profit estimates are “running well ahead” of actual EPS growth, he cautioned, pointing to the figure below.
“To what extent is this EPS growth enthusiasm similar to the over-investment in cabling by the Telecoms in the late 1990s, fueled by ‘free’ money?” Albert wondered.
He took note of this week’s biggest market story: The rotation that’s seen US small-caps outperform big-tech by the most in a decade (or much longer than that, depending on your lookback).
The question, Edwards said, “is whether a rotation into smaller-cap stocks as the Fed cuts rates will be benign or whether the loss of price momentum in Tech and the Magnificent 7 pulls the rug from under the sector and panic selling ensues.”
The charts above are crowdpleasers. They illustrate the gargantuan tech valuation premium, which Edwards called “a ticking timebomb.”
If you’re wondering whether Albert’s subject to the same kind of career risk that compels virtually everyone else working as a Wall Street strategist to turn bullish if correction calls don’t pan out sooner rather than later, the answer’s “no.” Or, more aptly, “NO.”
You’ll never — never — get a bullish call out of Edwards. It’s all recessions, all crashes, all the time. Which is to say it’s entertainment. Or “alternative” strategy, if you like.
SocGen’s house call on US equities, which belongs to Edwards’s colleague Manish Kabra, sees the rally broadening out and the S&P shuffling mostly sideways for the balance of the year.
Writing Thursday in the same note, Albert summarized the thinking behind his unshakable penchant for doomsday prophecies. “Bad stuff happens,” he said. “The warning signs are there if you look for them.”
“Do Androids Dream of Electric Sheep?” – Philip K. Dick (1968)