Tech Massively Overvalued; Market Turn Likely Imminent

The Global Fund Managers Survey (FMS) by Bank of America ($Bank of America(BAC)$) is an interesting barometer for the sentiments of some of the biggest institutional players in the market (and which has received frequent attention in the course of our commentary over the past year or so).

In the latest survey, survey respondents indicate that their risk appetite remains depressed and not far from the extreme pessimism of 2022 and comparable to the levels of the 2009 Great Financial Crisis (GFC). A net 29% of survey respondents are “underweight” equities, down from 31% in March. Similarly, the growth expectations worsened to December 2022 levels with a net 63% expecting weaker global growth.

35% of the respondents opine that the Federal Reserve will start cutting rates only in Q1 2024 while 28% expect this process to start a quarter earlier. All in all, market sentiment effectively holds that the next quarter will be a wash.

Other salient points of consensus were:

• Net 84% contend that global CPI will be heading lower;

• Net 58% predict the prevalence lower short-term rates, which is the highest consensus since November 2008;

• The biggest 'tail risks' to the global economy are bank credit crunch & global recession (35%) followed by high inflation that keeps central banks hawkish (34%);

• Cash allocation has remained above the 5.0% tactical "buy" signal since November 2021;

• Fears of a credit crunch has driven bond allocation among these institutional players up by 9 percentage points Month-on-Month (MoM) to a net 10% Overweight, which is the largest overweight metric since March 2009;

• Survey respondents’ quoted underweight status in equities relative to bonds is now also at levels not seen since the GFC

Now, one key reason why fund managers have reported being “underweight” on equities has been that overall capital allocation has continued to favour holding equities. As of April, the FMS reported that U.S. tech companies are now more than 2 standard deviations away from the performance of the S&P 500.

This level of disparity was witnessed two times before: in 1970 and 2000. Shortly after reaching these highs, the tech sector took a drop (along with the rest of the market) and went on to significantly underperform for a decade afterward in both cases.

When bond discount rates are structurally increased, equity valuations become progressively more prominent for institutional investors. This becomes particularly relevant when fundamental growth, as highlighted by economic indicators, becomes stagnant. When investors realize that these highly-overvalued stocks are ultimately valued at massive multiples, their valuations are at a major risk.

In the weeks since the Survey was published, the U.S. stock market has seen a flight to broad-market funds by institutionals and money market funds by major investors. In both cases, tech stocks continually edged upwards and somewhat subsided in some measure, albeit with an upward trend. The most widely-read indicator is the earnings beaten which, however, comes with a caveat: analysts’ consensus on target earnings tended to be somewhat generous. When these heavily-discounted expectations were beaten, some market participants read this to mean outperformance. In reality, the hurdles were set too low

Even in the week that has passed, Big Tech was the prime mover for the S&P 500 ($S&P 500(.SPX)$ in index form and $SPDR S&P 500 ETF Trust(SPY)$ in ETF form) despite momentum continuing to dwindle:

On the tech-heavy Nasdaq-100 index ($NASDAQ 100(NDX)$ in ETF or $Invesco QQQ Trust(QQQ)$ in ETF form), however, the momentum is a net negative on a week-on-week basis:

The net result from these two differing picture could be summed up thus: while there was indeed some single-name buy-in action among tech stocks, the bulk of market movement could be attributable to broad-market ETF buying behaviour by major players. In a market desperate for direction, this behaviour is likely being misattributed as bullish market signals.

Investors should be wary reading too deeply into the tea leaves. However, for those interested in making tactical plays, investors can consider:

• the $SP5Y for the upside on the S&P 500 and the $LS -3X SHORT SPY ETP(SPYS.UK)$ for the downside

• the $QQQ5.UK for the upside on the Nasdaq and the $LS -3X SHORT QQQ ETP(QQ3S.UK)$ on the downside.

For articles on broader economic events that are tangential to tactical market movements, visit asianomics.substack.com. Latest articles show my interview with Hankyung TV (South Korea’s largest business news channel/publication) wherein the outlook for Korean markets was discussed as well as the full rationale behind my comments published on MarketWatch about the ongoing banking crisis.