Speculative Surge in Unprofitable Tech Stocks Raises Concerns
Optimism surrounding continued interest rate reductions by the Federal Reserve has spurred a remarkable rally in one of the more precarious sectors of technology. This upsurge has incited trepidation regarding a potential downturn for related equities.
A cohort of unprofitable tech stocks, as monitored by UBS Group, has experienced a staggering 22% increase since late July. In stark contrast, profitable tech stocks have only climbed by 2.5%, while the Nasdaq 100 Index rose by a modest 5.9% during the same timeframe.
This upswing has propelled the index—encompassing lesser-known entities such as SoundHound AI Inc. and Unity Software Inc.—to approach its zenith last witnessed in late 2021, a period characterized by ultra-low interest rates that ignited a speculative asset bubble, only to burst the following year.
On Wednesday, the index tracking loss-making technology firms ascended 0.7%, whereas the profitable tech stock index recorded a 0.4% gain.
The potential for a stock market hard landing was brought into sharp focus on Tuesday, as unprofitable tech stocks declined by 2.1%, significantly lagging behind the broader market.
Federal Reserve Chair Jerome Powell reiterated the challenging decisions facing policymakers as they contemplate further interest rate adjustments.
Even if the central bank enacts two additional rate cuts this year, the benchmark rate is expected to remain above 3%, a far cry from the zero-rate policies that previously fueled stock market exuberance during the pandemic.
Ted Mortonson, a technology strategist at Robert W. Baird & Co., remarked on the speculative nature of loss-making tech stocks. He characterized this moment as a phase of “speculative excess and euphoria,” spurred by the anticipated rate-cutting cycle that has rekindled the market’s animal spirits.
He cautioned, “This rally appears highly frothy and incredibly perilous, with various speculative maneuvers by Reddit and Robinhood retail investors rendering the market reminiscent of a casino. Ultimately, I foresee this ending in disillusionment.”
Mortonson further elaborated that evaluating the worth of loss-making companies based on Federal Reserve intentions is “extremely tricky,” given ongoing inflationary pressures and the ramifications of artificial intelligence on the labor landscape.
Reduced borrowing costs are critical for these firms, which depend on financing to sustain elevated growth rates, with valuations predicated on profits that may take years to materialize.
Amid these concerns, some investors assert that the recent rally is warranted, especially when considering that the magnitude of this so-called “junk buying spree” is not as pronounced as in earlier rate-cutting cycles.
Anthony Saglimbene, Chief Market Strategist at Ameriprise Financial Services Inc., expressed that “enthusiasm is not entirely unfounded,” given the resilience of economic growth and a clearer earnings outlook for the tech sector compared to other industries.
He mentioned that artificial intelligence serves as a significant long-term tailwind, while the interest rate setting remains relatively accommodating.
“It’s unsurprising to observe increased risk-taking behavior in speculative arenas where untapped upside potential exists,” he noted.
Nonetheless, Saglimbene cautioned that the rally in loss-making tech stocks could swiftly revert. These equities may experience heightened pressure compared to high-quality tech stocks should a comprehensive economic downturn occur.
He warned that the Federal Reserve may continue to tread cautiously in adjusting the interest rate trajectory. If it opts for more aggressive rate reductions, it could indicate signs of economic distress, which would spell trouble for high-risk or loss-making tech assets.
While the current market is exhibiting risk-on tendencies, what has spurred success could equally sow the seeds of failure.
Source link: News.futunn.com.
