Strategists at Societe Generale (OTC:) are warning growth-oriented investors that a bubble in the U.S. technology sector could be about to burst.
The bank highlighted the large market capitalization of U.S. technology companies, noting that small caps have recently surged in contrast to declines for big tech companies, including the “Magnificent Seven.”
“With the US tech sector now accounting for around 35% of the S&P 500's market capitalization, investors need to be increasingly wary of a potential bubble burst,” Societe Generale global equity strategists wrote in a note.
The comments from Societe Generale's analyst team reflect concern that stock markets are on the brink of a decline that could be reminiscent of the first full-blown bear market since the 2008 global financial crisis.
The bank also cited historical patterns of financial bubbles and collapses, suggesting a simple reversal in price momentum could trigger a sell-off.
“But one can almost hear people asking: ‘What about the AI boom?’ The 2022 tech bust saw US 10-year Treasury yields rise from 1.5% to 4.25%, sucking the valuation lifeblood out of the US tech sector, causing it to fall by around 35%.
“Then suddenly, OpenAI ChatGPT launched on November 30, 2022, sparking a groundswell of optimism the likes of which have not been seen since the late 1990s.
“Since the beginning of 2023, US tech stocks are up over 100% and the S&P is up about 50%. What's not to like?”
Societe Generale global strategists have warned of a possible sharp sell-off in U.S. stocks, while their U.S. equities colleagues have a more optimistic outlook, predicting a gentle rotation out of tech stocks and broadening market breadth.
Still, the global strategy team draws comparisons between the 1990s and the famous Nasdaq bubble collapse.
“US tech earnings have also risen strongly since ChatGPT's starting gun went off. But those of us who lived through the 1990s will recall that the Nasdaq bubble of the time was fuelled in part by physical investment in what turned out to be overcapacity.”
“Ponzi investing has boosted sector returns but not enough to justify valuations, and some skeptics are already warning that the current AI boom has similar characteristics,” the strategists concluded.
