Aug 5, 20213 min read

Are Big Tech Stocks Overvalued?

Over the last week, the world’s biggest tech stocks announced their quarterly earnings. Between Apple, Microsoft, Amazon, Alphabet, and Facebook, the performance was astounding. Revenues were up by $332 billion — a rise of 36%. Tech stocks have been the story of the pandemic, raking in the money at stunning rates.

However, these earnings announcements failed to spur further investment. Alphabet share prices did rise slightly during the week, but the other tech giants dropped — with Amazon down almost 10%. Each of these stocks is near its all-time highs, and it seems many investors are taking this opportunity to cash out some profits.

Is this an admission that tech stock prices have peaked, or they’re overvalued?

Have Big Tech Stocks Peaked?

Before the big tech companies announced their earnings, the Dow Jones Industrial Average took a tumble. There’s been lots of talk about market crashes and bubbles since the pandemic market recovery, so this was an uncomfortable dip for many investors. However, the drop was soon reversed, with many tech stocks getting back to all-time highs.

Market sentiment seems strong, according to Morgan Stanley’s E-Trade Financial survey. Those surveyed were all investors with $1 million or more in a self-managed brokerage account. Only 6% of respondents felt the market would drop by 10% or more in the third quarter, while 65% of investors said they were bullish.

Tech stocks still seem to be favoured among wealthy investors, with 46% of those surveyed suggesting that the tech market is where they hope to make gains during Q3. Energy stocks are another favourite for millionaire investors, but big tech’s consistent earnings meant it kept its place at the top.

Are Tech Stocks Slowing Down?

Of course, not everyone is quite as bullish about tech stocks. In July, Lisa Shalett, Morgan Stanley Wealth Management’s chief investment officer, sounded warning signs about the market.

Shalett warned that low rates had pumped tech stocks up to dot-com era valuations. She cited price to sales ratios in tech at levels not seen since the 2000 peak. Additionally, because tech stocks have a more significant weight in the S&P 500 than they did in 2000, Shalett suggests the price to sales ratio of the index is 50% larger than ever.

Potential trouble lies ahead because of a weaker US dollar, increased competition, stricter regulations, and higher taxes. Many fear that a tech stock slowdown will disproportionately affect the broader market.

Conclusion

Recent months have seen tech stocks slow down while some investors shift their focus to cyclical stocks while reopening trade. Digitisation, remote working, and streaming were all trends that accelerated during the lockdown. But, as the vaccine rollout continues, some investors believe reliance on tech will slow down.

Indeed, tech stocks are up 10% in the last six months, less than the S&P 500 at 13%. Despite this, tech stocks’ impressive recent earnings suggest that their price-earnings ratios are dropping, indicating a solid long-term bet. With some twists and turns expected in the broader economy, tech stocks might be the only safe haven in the case of a market fall.

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