Tech Stocks’ Multiples Too Rich to Keep Fueling S&P 500 Rise, Says Sage

Tech stocks have propelled the market’s advance for some time now. But what if tech, particularly its top players—the so-called Magnificent Seven—stalls out? That is a very possible scenario, according to Jack Ablin, CIO and founding partner of Cresset Capital Management LLC.

In a research note, Ablin pointed to a wide gap between the S&P 500 information technology sector’s high price/earnings multiple of 30.7 and that of the entire index, 20.4. That tech premium, of 50.5%, likely will be a drag on the tech sector’s returns going forward, he wrote: “Historically, tech has had a tough time outperforming the market over the subsequent 12 months at such wide valuation differentials.”

In other words, tech prices are already too expensive for investors to stomach buying them if prices go even higher. A year ago, the gap was just 25%, Ablin went on, meaning that tech had more room to grow—and to take the entire index up with it. Over the ensuing 12 months, the tech sector rose 49.5%, while the S&P 500 itself was up 14.3%. By market cap, the tech sector has slightly more than one quarter of the entire index, vastly outdoing other sectors.

For Ablin, a well-regarded market analyst, the reason to doubt future price appreciation of tech stocks goes beyond historical quant stats and sticker shock. There is strong doubt that tech’s earnings in coming quarters will be spectacular enough to propel the sector’s stock prices sharply upward, he reasoned.

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“Notwithstanding the market’s recent reversal, this year’s remarkable performance has left the market’s largest tech stocks vulnerable, as investors worry about future profits,” he indicated. Third-quarter earnings reports from Alphabet, Meta and Apple “were met with widespread selling,” as they did not dazzle, he stated.

The slide that began in August (but appeared to reverse this month) lowered P/Es, but they still are too high, Ablin opined. “Tech behemoths nonetheless remain fully valued, and future earnings growth expectations could be in doubt,” he added.

To be sure, a number of market forecasters see good days ahead next year, both for tech and the overall index, FactSet Research reported. For Q1 2024, analysts predict a year-over-year earnings expansion of 6.7%. For Q2 2024, they project earnings growth of 10.5%. That is better than the 4.1% in the just-completed third quarter and the expectations for the current December-ending period, only 3.2%.

The reasons: an anticipated inflation slowdown in both materials and pay and a leveling off of interest rates, if not a reduction. Those factors’ effects on the Magnificent Seven, tech in general and the overall market remain to be seen.