Equities run out of steam

No sooner had stock markets climbed back to record or multi-year highs late last week than they had another US-induced attack of vertigo. Technology stocks led the sell-off, with America’s tech-heavy Nasdaq index losing almost 5% in three days. The world’s 14 biggest internet companies have now lost 20% of their value in little more than a month.

The S&P 500 slipped into the red for the year early this week. Britain’s FTSE 100 suffered its worst day in a month on Monday. Three UK e-commerce stocks, recently-listed Just Eat and AO World, plus Asos, fell by 6%-14% in two days.

What the commentators said

The stocks that have sunk furthest are those that flew highest in the past year, said Justin Lahart in The Wall Street Journal. Some new-era tech stocks have fuelled fears of another bubble in Silicon Valley. The firms are much “longer on promise than they are on earnings, with valuation multiples so far beyond rich as to be almost meaningless.”

But ‘tech bubble 2.0’ isn’t the only factor spoiling investors’ risk appetite. China’s slowdown, the increasingly tense stand-off in eastern Ukraine, and the US Federal Reserve’s ongoing tapering aren’t helping. Earnings forecasts have fallen, with S&P 500 first-quarter earnings expected to come in 3% below last year’s tally.

At the start of the year, 2% profit growth was expected. A rapid jump is unlikely any time soon. A key problem is that profit margins are already at a record high, leaving sales growth to power profits, and the US and global economy are only recovering gradually.

Nasdaq chartGiven the uninspiring fundamentals, more and more investors seem to be wondering if it isn’t just the tech sector that looks pricey. As Michael Mackenzie points out in the Financial Times, the S&P 500 is on a forward price/earnings ratio of 15.2, compared to a long-term average of 13.8.

In cyclically adjusted terms (which takes a longer view of earnings), it is more than 50% overvalued compared to the long-term average.

Be afraid, said Lahart. Market sell-offs typically have an identifiable trigger, such as the release of a lousy piece of economic data. “Share prices crumbling just because prices have reached a point where investors can no longer stomach them can signal real trouble.”

When the big bear market began in March 2000, after the first tech bubble burst, there was “no compelling cause”.

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

MoneyWeek magazine

Latest issue:

Magazine cover
What a farce!

John Stepek on surviving the Greek fallout

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

From ADRs to Z scores – all the terms you wish you understood, but were too embarrassed to ask about.

Gervais Williams: if you want real dividend growth, buy small-cap stocks

Merryn Somerset Webb interviews small-cap stock expert Gervais Williams about how penny shares outperform blue chips 'again and again'.


Which investment platform is the right one for you?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from, with varying fees and charges. Find out which is best for you.


30 June 1937: The 999 emergency services line opens


On this day, the 999 emergency services telephone line opens in London, but it wasn't until a week later that the first call was received when a man spotted a burglar in his garden.


Anatomy of a Grexit: how Greece would go about leaving the euro

Jonathan Loynes and Jennifer McKeown, economists at Capital Economics, look at the key issues and challenges of a Grexit, how it might be best managed, and set out a timetable for change.