Nasdaq 100 futures held steady this morning after tech stocks neared record highs yesterday. Some analysts are worried there is a bubble in tech, as unprofitable small-cap tech companies are outperforming companies with actual profits on the Russell 2000. Valuations look frothy but could go higher if AI capex increases beyond its already high levels.
Nasdaq 100 futures are flat this morning, premarket, after the tech-heavy index rose a solid 1.3% yesterday, nearing its record high. By contrast, the broader S&P 500 index rose “only” 1%. The Nasdaq is up 20% year to date. (The S&P is up 14.5%.)
Yet on Wall Street, analysts are increasingly asking whether tech stocks are in a bubble, and one crucial stat keeps coming up: About 40% of the companies in the small-cap Russell 2000 index have no earnings or negative earnings, according to Apollo Global Management chief economist Torsten Slok. “Something remarkable is going on in the equity market. Stock prices of companies with negative earnings have in recent months outperformed stock prices of companies with positive earnings,” he said on his blog.
Most of those unprofitable companies are tech companies, he told Fortune.
This quirk was also noticed by Morgan Stanley chief investment officer Lisa Shalett. “More than a third of the Russell 2000 remains unprofitable [and] small-cap companies’ cost of capital is well above their return on assets,” she said in her most recent weekly note.
Savita Subramanian and her colleagues at Bank of America are also concerned. They said stocks were “frothy to bubbly” in a recent note because the S&P 500 is now “richer” than it was in the year of the 2000 dotcom bust on nine of 20 metrics they use to gauge whether stocks are in bubble territory.
“Of 20 valuation metrics we regularly track, the S&P 500’s market cap to GDP, price to book, price to operating cash flow, and enterprise value to sales have hit new records,” they said. “The index eclipses its March 2000 metrics on five others: Price to GAAP EPS, median P/E,…
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