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Societe Generale (OTC:SCGLY) strategists issued a warning to growth-focused investors about the possibility of a bubble burst in the US technology sector.
The banking giant highlighted the significant market capitalization of US Tech within the S&P 500 and pointed to the recent surge in smaller stocks contrasted with a decline in larger tech companies, including the 'Magnificent 7' mega-caps.
"With the US Tech sector now accounting for some 35% of the S&P 500 market cap, investors need to be on high alert for a potential bursting of the bubble," Societe Generale global equity strategists wrote in a note.
The commentary from SocGen's team of analysts reflects concerns that the equity market may be on the verge of a downturn, reminiscent of the first full-blown bear market since the 2008 Global Financial Crisis.
The bank also alluded to historical patterns of financial bubbles and crashes, suggesting that a simple reversal in price momentum could prompt a sell-off.
"But ‘what about the AI boom?’ I hear you holler. The tech swoon in 2022 saw the Nasdaq 100 slump c35% as US 10y bond yields rose from 1½% to 4¼%, sucking the valuation lifeblood from the US Tech sector.
"Then suddenly on 30 November 2022, the launch of OpenAI ChatGPT triggered a surge in optimism unlike anything seen since the late 1990s.
"Since the start of 2023, US Tech has risen by over 100% and the S&P by some 50%. What’s not to like?"
While SocGen's global strategists are warning about the potential for a sharp sell-off in US stocks, their US equity colleagues hold a more optimistic outlook, anticipating a benign rotation out of Tech and a broadening market breadth.
Still, the global strategy team has drawn parallels to the 1990s and the famous Nasdaq bubble burst.
"US Tech earnings have also risen strongly since the ChatGPT starting gun was fired. But those of us who lived through the 1990s will recall that the Nasdaq bubble back then was partly fuelled by physical investment in what turned out to be excess capacity."
"That Ponzi spending grew sector earnings, but never by enough to justify valuations. Some sceptics have already warned that the current AI excitement has similar characteristics," the strategists concluded.
