The Nasdaq may only be beginning to have problems. Technology stocks may be on their way to a crash like the long bear market that followed the burst of the dot-com bubble.
That’s what Albert Edwards of Société Générale thinks. An often-bearish strategist wrote a client note on Thursday that questioned every part of the bull case for the AI boom, which has helped push major U.S. stock indexes to all-time highs.
He began with the idea that the market can safely move away from Big Tech’s control without causing the S&P 500 to drop.
In the past, markets that are very concentrated have often been right before crashes. This happened before the global financial crisis of 2007–2008 and the bear market of 2022. Edwards doesn’t see any reason for things to be different this time.
The sky-high valuation of Nvidia Corp. (NVDA, +2.63%) and other megacap peers seems to be at least partly justified by the speed with which the company is making money. Supporters of artificial intelligence say that this is what makes it different from the dot-com bubble.
Edwards, on the other hand, doesn’t agree. Instead, he said that a lot of money being put into networking gear during the height of the dot-com bubble helped Cisco Systems become the world’s most valuable publicly traded company for a short time. Soon after, most of the value of its shares went down.
Cisco also saw fast growth in earnings, just like Nvidia. But Cisco’s value still went up a lot more than it should have, in part because Wall Street had high hopes for the company’s growth.
“People who lived through the 1990s will remember that the Nasdaq bubble was partly caused by investing in what turned out to be too much capacity,” Edwards said.
“That Ponzi scheme spending increased company profits, but never by enough to justify prices.”
Edwards said there were signs that something like that might happen today. Tech earnings-per-share growth has been strong since ChatGPT launched in November 2022. However, Edwards said that expectations have started to rise above what companies have recently reported. When the dot-com bubble popped in the late 1990s, the same thing happened.
Edwards pointed out that Wall Street analysts have stopped raising these estimates. Since the short-term performance of the Nasdaq-100 is closely linked to the ups and downs of analysts’ optimism, this could be enough to send technology stocks plummeting.
Edwards also believes that economists on Wall Street have overestimated how likely it is that the U.S. economy will go into recession.
The Nasdaq Composite was down 1.1% Thursday afternoon, and it looks like it will end a six-week winning streak. This is the biggest weekly drop for the index since April 12.
On Thursday, the so-called Magnificent Seven, a group of megacap stocks that investors think will do well because of AI, had mixed trading. Nvidia, Meta Platforms Inc. META, +3.00% and Tesla Inc. TSLA, +0.29% were all up, while Microsoft Corp. MSFT, -0.71%, Amazon.com Inc. AMZN, -2.22%, Alphabet Inc. GOOG, -1.86% GOOGL, -1.84% and Apple Inc. AAPL, -2.05% all went down.
Roche, a Swiss drug company, announced positive results from an early-stage study for a weight-loss drug. This caused shares of Eli Lilly & Co. LLY, -6.26% to drop. Many people want to buy Eli Lilly’s GLP-1 drugs this year, which has caused its stock price to rise.
The Dow Jones Industrial Average (DJIA) was down 1.4% and the S&P 500 SPX was down 1.1%.
