Tech stocks & Bitcoin retreat on valuation fears
US equities tumble on valuation fears
The S&P 500 declined 1.2% overnight, while the tech-heavy Nasdaq 100 dropped 2.0%. High-profile Tesla and Nvidia bore the brunt of selling, falling 5.2% and 4.0% respectively. The sell-off highlighted growing concerns about US stock valuations after a strong year-to-date rally.
Palantir, arguably the most expensive stock in the S&P 500 by various metrics, plunged 7.9% despite announcing positive financial results. The market’s reaction underscored investor nervousness about premium valuations, even when companies deliver solid earnings beats.
The S&P 500 now trades at 23.1 times forward price-to-earnings ratio, according to Factset data. This represents a significant premium to the five-year average of 19.9 times, and marks the highest level since September 2020.
Valuation concerns have intensified as the index has climbed higher throughout the year. Investors are questioning whether current price levels can be sustained, particularly on stocks boosted by the AI boom if interest rates remain elevated for longer than expected.
Strong earnings underpin market gains
Despite the pullback, the year-to-date rally has fundamental support. Approximately 63% of S&P 500 constituents have released third quarter results as of 31 October.
Corporate earnings have proven robust, with 83% of reporting S&P 500 constituents exceeding earnings expectations. The blended earnings growth rate currently stands at 13.8%, surpassing the growth rates achieved in both the first and second quarters.
The earnings season has provided solid evidence that valuations, while elevated, are mostly backed by genuine profit growth rather than pure speculation.
Technical perspective on US Tech 100
The recent pullback represents a healthy calibration after an extended rally. From a technical analysis standpoint, we highlighted signs of weakening bullish momentum in the US Tech 100 in the latest Weekly Market Navigator, suggesting a correction could be imminent.
The index currently sits at the support of its 20-day moving average and the lower bound of an ascending channel formed since mid-May. These technical levels will prove crucial in determining whether this represents a brief pause or something more significant.
A 50% Fibonacci retracement of the last upward wave could take the index towards 24,635. The critical support zone lies around 23,000. A failure to maintain support at that level would significantly increase the probability of a bear market developing. Until then, the decline could be interpreted as a correction rather than a major reversal in trend.
