By Angela Palumbo
Big Tech stocks are leading the market higher. But with record high valuations and projected earnings, The Bahnsen Group's chief investment officer warns that a correction is coming.
In an interview with Barron's, David Bahnsen -- a financial advisor who oversees the management of over $5.3 billion in client assets -- says "it is absolutely inevitable, whether it's in five minutes or five quarters, that some point is coming where there's a disappointing earnings result, or disappointing quarter."
Excitement about generative artificial intelligence has helped major tech stocks like chip maker Nvidia and Google parent Alphabet jump over the past year. The Nasdaq Composite, Nasdaq 100, and S&P 500 Info Tech sector indexes are now on pace for their best monthly performance since November 2023, according to Dow Jones Market Data.
As these stocks continue to rise, so do their market capitalizations. Microsoft shares have gained 21% this year, and it is now the most valuable company in the country with a market cap of $3.37 trillion. Amazon.com stock has increased 28% in 2024, and the company's market value exceeded $2 trillion for the first time in its history.
Bahnsen says he believes these increasingly high stock prices and valuations means a tech correction is upon us. While earnings and revenue growth has been phenomenal, any pullback in spending on AI chips could have a big ripple effect, he says.
The concern that valuations are running too hot can be seen in some stock moves this week. As of midday trading on Friday, Nvidia is down 1.7% this week while Qualcomm has fallen 6.1%, Micron Technology has dropped 5.3%, and Broadcom has declined 3.9%.
"They are too expensive. That's it. They're just way too expensive, and so you get people that are early to get out, or at least clip significant profits," Bahnsen said, explaining this week's moves.
There are optimists on Wall Street, however. Wedbush analyst Dan Ives wrote in a research note on June 20 that while "the bears will continue to harp on valuations," he says that "investors must see the forest through the trees to where this spending wave (and estimates) can head over the next 3 years and we believe over 70% of enterprises will ultimately head down the AI use case path as we estimate a $1 trillion of incremental AI spend over the next decade."
If a correction is in order, Bahnsen recommends investors take the moment to buy stocks with a history of paying dividends in defensive sectors like healthcare, consumer staples, and utilities. Specifically, Bahnsen points to specific stocks such as American Electric Power, Gilead Sciences and General Mills.
"People could try their luck and just continue to buy yesterday's winners," he said. "I'm suggesting those names as wonderful examples of companies that have had some sort of catalyst to weakness and disruption that is inevitably fixable."
Write to Angela Palumbo at angela.palumbo@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
June 28, 2024 14:41 ET (18:41 GMT)
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