It’s a Matter of Time Before the Tech Bubble Bursts
Many investors may have noticed that some notable tech stocks have started to lose steam. They’ve lost enough steam, in fact, that they will have started to ask themselves a question they were afraid to ask. Is the NASDAQ going to blow up Wall Street? Or, better, has the tech-sector-driven market rally that began last November been one huge market bubble?
No less than Goldman Sachs Group Inc (NYSE:GS) started sounding the siren and shooting the first salvos of the dreaded “market bubble” a few weeks ago. (Source: “Apple, Facebook and other big tech stocks tank, weigh on Wall Street,” CNBC, June 9, 2017.)
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Now, less than a month later, Americans have woken up after the Fourth of July fireworks to the tune of more explosions.
They are preludes to the big bang of the tech bubble bursting. Some major NASDAQ tickers like Tesla Inc (NASDAQ:TSLA) for example, have already taken a dive. There’s no telling where the descent will stop and how many other stocks it will drag down. Goldman warned of tensions in the U.S. tech industry and since then, tech stocks started to weaken.
There have been individual cases and reasons prompting sellers. But it’s the whole industry that has come under pressure now. The bubble risk was always there. Tech stocks have been running on speculative performance estimates rather than actual performance. Thus, few investors really ever slept comfortably at night, worrying about the safety of their tech stocks. But the ride was exciting. For weeks, tech companies acted as the market locomotive, building bullish inertia. But even the toughest bull must stop for obstacles.
Now, the newspapers are starting to discuss the risks that the tech bubble is about to burst more explicitly—just as they were in the 2000s. Even when stocks achieve milestone highs, such as Oracle Corporation (NYSE:ORCL), the media can’t help but present the results in relation to the tech bubble. (Source: “Oracle is riding the cloud to all-time highs above dotcom bubble levels,” CNBC, July 5, 2017.)
It’s clear that there are solid risks that the market could witness a rapid price deflation; the kind that many refer to as a bubble bursting. It might still be too early to pinpoint the date, or even to determine if the bubble will burst as if to replicate the dotcom bubble.
But, given the extent to which stock prices have been pushed, perhaps it would be time to stop examining the situation and take action. The alternative is to risk an overwhelming disappointment in the quest for pocketing overwhelming returns in a sea of market risks.
It’s not just that the tech stocks have valuations that make no sense in relation to earnings. There’s no doubt that price-to-earnings (P/E) ratios averaging 25 are positively insane. Some of the biggest tech stocks reflect companies that have no real earnings as such. But financial analysts can weave fancy tales using models to discuss the future potential to justify the rising prices.
But, even if you trust the stock story weavers that are pushing valuations higher, there is a major market risk brewing. Many investors are exposed to the stock market even amid growing geopolitical turmoil and economic uncertainties. Not everyone has explicitly spoken about a bubble, but even the most optimistic of analysts must have some concerns when a text messaging company like Snap Inc (NYSE:SNAP) has an IPO that makes it worth as much as some automobile manufacturers with decades of history and thousands of employees. Some have pointed out that even the Swiss National Bank (SNB) is widely exposed to the hi-tech industry.
Thus, beware the so-called FAANG (Facebook Inc (NASDAQ:FB), Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX), and Alphabet Inc (NASDAQ:GOOG) or Google) in the next few weeks. These five alone account for some $126.0 billion in market capitalization. They can drag many others, even genuinely valuable ones, down for the ride in one major stock market crash.
