Tech Investors Need a Reality Check

Editor's note: Tech companies have taken the market by storm. But according to Joel Litman – founder of our corporate affiliate Altimetry – the euphoria won't last forever. In today's Weekend Edition, we're taking a break from our usual fare to share one of Joel's essays, updated from a February issue of the free Altimetry Daily Authority e-letter. In it, Joel details why a sudden pullback in tech stocks wouldn't be all that surprising...

The tech takeover is leaving commodities in the shadows...

Over the past year, investors have been captivated by the "Magnificent Seven" tech stocks. These industry giants now account for 30% of the S&P 500 Index's market capitalization... despite only bringing in an estimated 20% of earnings.

And tech itself has a disproportionate influence on the market. The sector's weight is roughly eight times that of the energy sector, which accounts for 4% of the S&P 500's market cap.

Most of the past year's economic growth has been in the digital arena. Tech companies like Microsoft (MSFT) and Nvidia (NVDA) dominated the market thanks to their AI investments.

But for an economy to grow – even a digital economy – we need physical goods.

AI relies on lots of data centers, wires, computing power, and power plants to fuel all that demand. And all of that physical infrastructure relies on real materials like metal, electricity, and plastic.

As I'll explain, the optimism for technology is getting ahead of economic reality. And as euphoria continues climbing to irrational highs, the market might be in for a correction soon...

It has been decades since investors lost sight of reality to this extent...

Take a look at the following chart from Bloomberg. By comparing the price of the Nasdaq 100 Index with the Bloomberg Commodity Spot Index – which reflects the price action of commodity futures – it shows how much tech investors are getting ahead of themselves.

The higher the ratio, the more investors are betting on tech... and leaving the commodities that empower tech behind. It's a sign that tech investors have gotten too bullish, too fast.

The ratio has been on the rise for several years now. And as of late January, it was fast approaching 40 times. The only other time it surpassed that level was at the peak of the dot-com bubble. Check it out...

Commodities fluctuate based on supply and demand. So it's unlikely that they're trading for cheaper than they should be.

While big AI companies like Nvidia had record results last year, this chart shows massive stock gains in the tech sector are being driven by hope more than fundamentals.

And based on the big dislocation between tech stocks and commodity prices, tech isn't growing quite as fast as investors were banking on.

In other words, the market is approaching a crossroads...

Either commodities will start to catch up, or the tech sector will have to pull back.

A sudden commodity rally seems unlikely. Several world economies have flirted with recession territory recently. And as my Altimetry readers know, I think the U.S. is close behind.

Global economic growth is going to keep suffering. That's a recipe for tech valuations to start falling.

So while the tech sector's growth has been phenomenal, this imbalance suggests a correction could be ahead.

That's why I'd tread carefully in this AI mania moving forward.


Joel Litman

Editor's note: The biggest moneymaking story of 2024 will likely have nothing to do with the Magnificent Seven...

In short, a historic anomaly is creating a rare, short-term opportunity for investors. This situation is almost a mathematical impossibility... And it won't last. That's why on Tuesday, March 26, at 10 a.m. Eastern time, our founder Porter Stansberry will sit down with Joel to reveal the details.

This setup has already caused one stock to surge 170% – in a single trading day. But Porter and Joel believe this once-in-a-lifetime market event could deliver a lot more upside... if you know how to take advantage of it. Click here to learn the full story.