Technology stocks are staging a rebound on Wednesday after nearly shedding all of their premium versus the S&P 500.
The spread between the multiples of the S&P 500 SPX and the S&P 500 information-technology sector XX:SP500.451020 reached its narrowest point since June 2020 as of Monday, according to Dow Jones Market Data, based on expected earnings for the next 12 months. As of Monday's close, the S&P 500's price-to-earnings ratio of 19.31 and the S&P 500 IT's of 20.03 at the market close made for a spread of 0.72, the data showed.
Nvidia's stock (NVDA), which is the largest constituent of the S&P 500, finished the trading day on Tuesday with a forward P/E ratio just a hair ahead of the S&P 500's (19.95 vs. 19.86), after its P/E multiple had actually dipped below that of the index in the prior three sessions.
Tech stocks have broadly bounced over the past two sessions, reflecting renewed hope that the war in Iran could soon wind down. Still, Nvidia's stock is trading well below its five-year average P/E multiple of 37.12.
Shares of Nvidia have struggled for momentum in recent months as worries mount over the sustainability of AI spending by hyperscalers, though Alphabet $(GOOGL)$ $(GOOG)$, Amazon.com, Meta Platforms and Microsoft $(MSFT)$ have collectively increased capital-spending plans by 60% this year to an estimated $650 billion.
TD Cowen analyst Joshua Buchalter said in a recent note that Nvidia's market capitalization of more than $4 trillion had put it in a position to trade differently from other stocks. He noted that "it's a lot harder to add the next $2T in market cap than the last $2T."
Read on: These stocks are 'the place to be' if you want serious AI growth, says BofA
Additionally, investors have been looking for other AI-related plays with more growth opportunities, such as in memory and semiconductor capital equipment.
"Several times we've heard feedback from investors that they see more torque and potential upside in the supply chain from those tied to Nvidia than Nvidia itself as a result," Buchalter said.
Meanwhile, Microsoft's (MSFT) P/E ratio has been below the S&P 500 IT sector for much of the past few months, according to Dow Jones Market Data. Shares recently traded at 20.28 times earnings expectations for the next 12 months, versus their five-year average of 29.22.
Microsoft's stock is down almost 23% this year and just clinched its worst quarter since 2008 in the face of concerns over the company's AI competitiveness and broader worries that the software sector will be hurt by AI. Still, much of Wall Street remains bullish on the company, with 92% of the 61 analysts tracked by FactSet having a buy rating on the stock.
Comments