Are Big Tech Stocks About to Crack?

We have a discussion about the market, MT20, and our Strategy, Growth and Income portfolios every day. Our discussion this morning was about how the problem is Big Tech – and Big Tech alone.

As one newswire writes – the problems are “stretched valuations, big tech index concentration, narrow breadth and AI capex ROI risks” – and whilst they aren’t going away anytime soon, we are wondering whether they are too glacial to cause a precipitous repricing. The speed of the transition from bubble prices to reasonable prices matters not – the overpricing of Big Tech, whether it manifests itself precipitously or glacially, will still manifest itself (we think) over time, and as such, we’re moving on from Big Tech (for now).

But the point is that the main market risk (Big Tech overvaluation) is quite a specific risk, not a universal equity market risk. Sure, if it manifests itself quickly, it would cause a significant drop in the headline S&P 500 and NASDAQ indices, but it would likely be confined in the fall, as it was in the rise, to the ‘Rock in a Sock’ stocks, and there aren’t that many of them.

Meanwhile, the US economy is doing OK, the results season has been great (average earnings growth of 12.5% versus consensus at 7.9%), interest rates are coming down, QT is ending (that’s like another rate cut), tariff tension has disappeared, and not every stock in the world is in the overvalued Magnificent 7. In fact, not all stocks in the Magnificent 7 are as overvalued as every other stock in the Magnificent 7 – and there are another Magnificent 30 AI-related chip, cloud and tech stocks that all deserve to be viewed on their individual merits, not as Nvidia (NASDAQ: NVDA) equivalents.

Within the Magnificent 7, Nvidia now stands out as the most overvalued Big Tech, having recently jumped 20.1% in six days, rising by more than the market cap of the Commonwealth Bank (ASX: CBA) in one day, after the “GTC AI Super Bowl” conference. It has dropped 8.0% in six days, having risen 20.1% in the previous six days. It is arguably now the most vulnerable Big Tech stock on a PE of 65.3x dropping to 43.2x.

As they say, a Porsche is a fast and sexy car, but you wouldn’t pay $1 million for a Porsche, no matter how fast or sexy it is. Some Big Tech stocks are unquestionably overvalued on current earnings, with share prices supported by sentiment towards future earnings, which the market is beginning to realise might not materialise.

The Palantir (NYSE: PLTR) CEO’s tirade against Michael Burry yesterday displayed a remarkable naivety about how the stock market works and is something I saw and others saw as a red flag – the sort of thing you look back on years later when Palantir is back to a PE of 22x and say, “Do you remember the Palantir CEO spitting the dummy about Michael Burry shorting his stock? That was the top”.

Bottom Line

We’re out of Big Tech as a theme; we were hanging out there a bit, very successfully, but we were overexposed to a single theme. We now look for a re-entry at a more sensible price, and our antennae are up as we look out for another theme or two that has the potential to deliver growth without significant risk.