The tech-stock bubble starts to hiss air

America’s stockmarket rally could one day rank among history’s greatest bubbles, says Andrew Parlin in the Financial Times. Shares offering even “a whiff” of exposure to such fashionable areas as “the cloud, digital payments” and “plant-based food” have soared since the pandemic began. Just look at Tesla, whose market capitalisation has vaulted from $80bn in March to more than $300bn today.

Turning point or bump in the road?

America’s tech-heavy Nasdaq Composite index soared by more than 70% from the March low to the end of August, but September has brought a rare reversal. The index lost more than 10% between 2 September and Tuesday this week, officially entering “correction” territory.

This has had little impact on the year’s gains, but still wiped an extraordinary $320bn off the market capitalisation of Apple in just three trading days. The sell-off had no clear cause, although some blame Tesla’s rejection from the S&P 500, while others have pointed at SoftBank (see page 7).

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Market optimists say that pullbacks are normal in a healthy bull market, says Mark DeCambre for MarketWatch. The S&P 500 had its “strongest August in 34 years” so a “bout of profit-taking” was to be expected, says Mark Haefele of UBS Global Wealth Management.

Yet bears see growing risks. “September is a notoriously weak month for investors”. That is even more likely to be the case in 2020 owing to fears of an autumn coronavirus wave and US election uncertainty.

Bulls say that talk of rich valuations ignores the fact that profits this year have been poleaxed by the coronavirus, says Russ Mould of AJ Bell. If analysts’ predictions of a strong earnings rebound next year come true, then the S&P’s rating of 16.7 times 2021 earnings looks, if not exactly a bargain, then not entirely insane either.

A debt-fuelled bubble

It is difficult to overstate the extent to which the US market rebound has depended on the technology giants. If you exclude Facebook, Apple, Amazon, Google, Netflix and Microsoft, the “S&P 500’s market cap is less than 1% higher than it was in January 2018”, says Mould.

The stock rally is also underpinned by debt, says Randall Forsyth in Barron’s. US federal debt will soon surpass 100% of GDP. Emergency spending in hard times is one thing, but America’s budget deficit was running at nearly 5% of GDP before anyone had heard of Covid-19.

The “debt binge” also extends to the private sector thanks to the Federal Reserve’s “whatever it takes” approach to stimulus, adds Michael Mackenzie in the Financial Times. From Japan’s 1980s asset bubble to the 1990s Asian financial crisis, history shows that easy money binges can leave assets “languishing” for years after the bubble pops.

Japanese equities have yet to regain their 1989 peak. Bulls beware: share prices juiced by unprecedented fiscal and monetary stimulus might finally be “hitting their limits”.