Tech Stocks Are Red Hot. Is It Time to Sell?

The Nasdaq 100, a technology-heavy index comprised of just over 100 fast-growing nonfinancial companies on the
Nasdaq Composite,
is up this year and was up more than 1% Thursday at one point during trading. That comes even as the
10-year Treasury yield
has gained to just over 4.1% from just below 3.9% to close 2023. Usually, tech stocks rise when yields fall and vice versa, because higher long-dated bond yields make future profits less valuable, and growth companies are valued on the basis that a bulk of their profits will come many years in the future. 

Instead, tech stocks are rallying even with higher bond yields. Part of the rationale is that the stock market expects yields to eventually fall as the Federal Reserve cuts interest rates to keep inflation and economic growth from dropping too much. One problem with that hope is that the Fed may not cut as many times as the stock market wants, especially since inflation still a bit above Fed’s 2% target and the economy remains strong. So yields may not fall enough to keep pumping tech stocks higher. 

Now, tech stocks simply look too expensive. The Nasdaq 100, at a multiple of about 25 times analyst’s expected earnings per share for the coming year, is up from about 21 times at the start of the rally, according to FactSet. While the current multiple is below historical peaks, it’s too high given where yields are. The price/earnings multiple means that, for every $25 an investor pays to own the index, he or she receives $1 of EPS for a year, for a 4% yield. That’s lower than the 10-year Treasury yield, whereas stock indexes usually yield more than safe government bonds. 

That’s just one way of assessing tech valuations, but another way also makes the sector look too pricey. The 10-year yield was at 4% just months ago, at which time the index had trouble pushing much above 25 times earnings. When the bond yield was at around 4% in late 2008, the Nasdaq 100 traded at about 18 times.  

To be sure, tech bulls will argue that the sector is growing earnings aggressively. Analysts expect aggregate EPS on the index to gain 15% on an annualized basis for the next couple of years, according to FactSet. That includes 12% sales growth, with the highest growth driven by companies such as
Nvidia,

Microsoft,
and
Meta Platforms,
which are using artificial intelligence-driven product enhancements to take market share. That’s likely enough to bring profit margins higher, spurring the bottom line increases. That’s why one could conceivably argue that tech stocks can trade at a premium to the
S&P 500’s
19 times. That index is only expected to see 11% earnings growth. 

But the problem is that the profit growth argument doesn’t exactly make tech stocks look screamingly cheap—and investors have already loaded up on them. 

Bank of America’s
fund manager survey, which encapsulates trillions of dollars under management, shows that tech is now the second largest overweight with portfolio managers out of 16 separate groups of equities. That means there are likely few buyers left to send the sector higher from here, and many investors could take profits by selling soon. Tech companies might have to beat fourth-quarter earnings estimates by an especially large amount in order for their shares to gain more ground. Anything less impressive could result in declines. 

That type of selling also makes sense, given technical trends. The Nasdaq 100 is about 12% above its moving average of prices for the past 200 days, according to FactSet. It’s getting close to a point at which the index has to pull back in the past. 

Those who have profited from tech could sell at this point and look for cheaper opportunities. 

Write to Jacob Sonenshine at [email protected]