Nasdaq - close to a crash?

• History shows that market gains driven by just a few stocks tend to be followed by crashes, according to a Societe Generale strategist

Shares of major tech companies listed on the Nasdaq may be headed for a bear market similar in duration to the dot-com bust in the early 2000s, according to Albert Edwards, chief global strategist at Societe Generale. , according to an article in MarketWatch late last week.

In a note to clients, the strategist whose views are often "bearish", disputed the arguments that have created real enthusiasm among artificial intelligence, a field that has propelled the rise of the Nasdaq index to new records.

History shows that market appreciations propelled by just a few stocks tend to be followed by crashes, as happened in the run-up to the global financial crisis of 2007-2008 and the bear market of 2022. But Edwards sees no reason why things should it's different this time.

Optimists say the stellar valuations of Nvidia and other big tech names are justified, at least in part, by strong earnings growth, which is what differentiates artificial intelligence from the dot-com bubble. But Edwards disagrees.

The Societe Generale strategist pointed out that massive investments in networking equipment helped Cisco Systems briefly become the world's most valuable publicly traded company at the height of the dot-com bubble. Shortly thereafter, its shares lost most of their value. Like Nvidia, Cisco's profits have grown rapidly, but the company's valuation has risen far beyond what might have been justified, in part because of Wall Street's inflated growth expectations.

"Those of us who lived through the 1990s remember that the Nasdaq bubble back then was fueled, in part, by physical investment in what turned out to be excess capacity," Edwards said. "Those Ponzi-type expenses increased the sector's profits, but never enough to justify the valuations."

According to the Societe Generale strategist there are signs that something similar may happen today. While tech companies' EPS growth has been robust since ChatGPT launched in November 2022, Edwards points out that expectations have recently started to be higher than what companies are reporting. Or, something similar happened during the formation of the dot-com bubble in the late 1990s.

The strategist also pointed out that Wall Street analysts have stopped raising their earnings estimates, which may be enough to send tech stocks lower, given that analyst optimism is closely correlated with the near-term performance of the Nasdaq- 100.

Edwards also believes that Wall Street economists have underestimated the likelihood that the US economy will go into recession, writes MarketWatch.

From the beginning of the year until last Thursday, the S&P 500 index had an increase of about 16%, while for the Nasdaq Composite, the index of companies active in knowledge-intensive fields, the appreciation was 19%, according to Investing.com data.