Strategists at Societe Generale (OTC:SCGLY) issued a warning to growth-focused investors about the possibility of a bubble bursting in the US technology sector.
The banking giant highlighted the significant market capitalization of US technology within the S&P 500 and pointed to the recent rise in smaller stocks in contrast to a decline in the largest technology companies, including the ‘Magnificent 7’ mega-caps.
“With the US technology sector now accounting for around 35% of the S&P 500’s market capitalization, investors should be on high alert for a potential bubble burst,” global equity strategists at Societe Generale wrote in a note. .
The comment from SocGen’s analyst team reflects concerns that the stock market may be on the brink of a recession, 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 crises, suggesting that a simple reversal in price momentum could trigger a sell-off.
“But ‘what about the rise of AI?’
“Then suddenly, on November 30, 2022, the launch of OpenAI ChatGPT sparked a surge of optimism unlike anything seen since the late 1990s.
“Since the beginning of 2023, US tech is up over 100% and the S&P around 50%. What’s not to like?”
While SocGen global strategists warn of the possibility of a sharp sell-off in US equities, their US equity colleagues have a more optimistic outlook, anticipating a benign rotation out of technology and widening market breadth.
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Still, the global strategy team has drawn parallels with the 1990s and the famous bursting of the Nasdaq bubble.
“U.S. tech profits have also risen sharply since ChatGPT was launched. But those of us who lived through the 1990s will remember that the Nasdaq bubble at the time was fueled in part by physical investment in which turned out to be excess capacity.
“Such Ponzi spending increased sector profits, but never enough to justify valuations. Some skeptics have already noted that the current enthusiasm for AI has similar characteristics,” the strategists concluded.
