U.S. tech stocks threatened by a “monster” that could spark a major crash

In July, U.S. tech stocks posted some of their strongest gains since 2020, fuelling optimism that new bull market signpost were emerging.

But, just weeks later that optimism appears to have evaporated with key indexes now in decline for three straight weeks. The bearish sentiment exacerbated by Federal Reserve chair, Jerome Powell’s comments at Jackson Hole last Friday, as anticipated by Asia Markets.

“Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy,” said Powell.

You can read the full Jackson Hole transcript here.

So what’s next for the likes of Microsoft, Apple, Alphabet, Meta, Tesla and other mega-cap U.S. tech stocks?

Technical analysis: huge problem for mega cap tech stocks

One multi-billion dollar hedge funds warns investors should not be fooled by a bear market rally.

“The common investment narrative remains that these companies have reasonable P/E ratios. Not only is the E coming off unsustainably inflated levels, but the P/E multiple is also too high compared to likely future growth, said Crescat Capital in a recent note to investors.

“Investors have been buying the dip and continue to get sucked into what we believe has been a mere bear market rally over the last two months, one that is starting to roll over again. “

Further, the firm draws parallels between the market today, and the tech bubble in 2000.

“At the height of the Tech Bubble in 2000, the top-10 US market cap tech stocks collectively reached an enterprise value of 30% of GDP. The problem then was the same as it is today. Growth expectations were too high for these companies, their valuations had simply become too rich relative to the size of the overall economy to justify the growth assumptions.

“Fast forward to year-end 2021, the height of today’s mega-cap-tech-led stock market bubble. The top-10 US market cap tech stocks collectively reached an even higher 56% EV to GDP, 87% higher than it was at the peak of the 2000 tech bubble. The record-breaking fiscal and monetary stimulus during Covid accelerated the move to the cloud and the corresponding IT spending boom… Once again, investors have extrapolated unsustainable growth and profitability to justify high valuations.”

So, it’s clear Crescat thinks mega cap U.S. tech has further to fall.

But how far?

The leading hedge fund has shared the chart below to illustrate the potential downside of the top 10 U.S. mega cap tech stock (Apple, Alphabet, Tesla, Nvidia, Mastercard, Microsoft, Amazon, Meta, Visa, and Broadcom), should they face the same cyclical low valuation levels that the top 10 U.S. tech stocks did in 2002. That was 6 times EV to GDP.

They conclude:

“The technical analysis of this macro/fundamental chart looks like a monster head-and-shoulders pattern.”

tech stocks
Image: Crescat Capital

You can read the full Crescat Capital investor letter here.