As the Q2 corporate earnings season begins, investors will gauge whether earnings confirm elevated technology stock valuations. According to Bloomberg data, almost 25% of technology stocks in the Nasdaq 100 Stock Index ($IUXX) (QQQ), including Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA), are priced at ten times sales or more. That compares to the index’s average of about five times.
Although tech stock valuations are frothy, they remain below those during the Covid-19 pandemic and the dot com bubble of the early 2000s, when price-to-sales ratios soared as investors piled into stocks. The artificial intelligence craze is a major factor fueling demand for technology stocks. Laffer Tengler Investments said, “We’re not at peak earnings yet for these companies,” on expectations that the biggest technology and internet stocks are best positioned to capitalize on the demand for artificial intelligence products.
Currently, the only Nasdaq 100 company with a price-to-sales valuation of more than 30 is Nvidia, well below the number of more expensive stocks at previous market peaks.
Despite a surge of more than +42% in the Nasdaq 100 Stock Index this year, some analysts believe the rally can continue. BlackRock is betting on the AI boom to keep the upside momentum rolling for technology stocks, saying, “New AI tools could analyze and unlock the value of the data gold mine some companies may be sitting on.” However, some analysts are concerned a slowdown in the economy will hurt profits and stock prices. Bank of America, Barclays, BNY Mellon Investment Management, Citigroup, Morgan Stanley, and Wells Fargo Investment Institute are among those forecasting that the index will end the year lower than it is now.
The latest leg of the technology stock rally is also being fueled by speculation that U.S. inflation and interest rates are near their peak. Deutsche Bank said the “growing hopes of a soft landing” are boosting stocks and bonds. However, Aptus Capital Advisors sees the elevated valuations of most technology stocks as a good time to lighten some of their long positions in the sector, saying, “Given the massive first half rally alongside current market breadth, tech appears a little expensive. We are being more selective and taking profits in our winners.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
