The stock market is flashing warning signs as tech shares are a 'valuation timebomb,' SocGen says

The tech sector is showing a number of signs that valuations are an overstretched "timebomb," according to SocGen.

• The hype for tech stocks could be approaching an end, according to Albert Edwards.
• The SocGen strategist has been warning of a recession and coming stock crash for months.
• The tech sector is showing a number of signs that valuations are an overstretched "timebomb," he said.

The stock market is flashing warning signs that the tech stock frenzy is about to end, according to one of Wall Street's most bearish analysts.

Albert Edwards, the chief global strategist for Societe Generale, issued another warning about the blistering 2024 stock rally in a note on Thursday. He's been on high alert for a recession and coming stock market crash for months, previously predicting that investors could soon face losses that mirror the dot-com crash in the early 2000s.

"As time marches on, there are few of us left who were in the industry during the 2000 Nasdaq crash let alone the 1987 crash. I was there, and the one thing I have learnt is not to be complacent. Bad stuff happens and the warning signs are there if you look for them," Edwards said in a note on Thursday.

Tech valuations are the big signal that something has to give. The sector has swelled to 35% of the total S&P 500. That's the highest portion tech stocks have accounted for in the benchmark index since the early 2000s, right before the enthusiasm for internet stocks gave way to a massive wipeout in the Nasdaq Composite that took a decade to recover from.

Wall Street still has lofty expectations for tech earnings. Analysts are expecting tech stocks to post forward earnings growth of around 30% year-over-year, Edwards noted, though tech stocks have actually been posting around 20% yearly earnings growth.

The earnings gap is quickly becoming apparent to analysts. Earnings-per-share upgrades have fallen sharply for the Nasdaq 100, while upgrades for the S&P 500 and Russell 2000 are on the rise.

The forward price-to-earnings ratio of the tech sector also looks "stretched," with the sector being priced around 32 times forward earnings estimates. That compares to the S&P 500, where the price-to-earnings ratio is hovering just above 20 — something that points to a "ticking IT valuation timebomb," Edwards said.

"And to what extent is this EPS growth enthusiasm similar to the overinvestment in cabling by the Telecoms industry in the late 1990s, fuelled by 'free' money? We could be about to find out," Edwards wrote. "What might pop this Tech bubble? A simple decline in EPS optimism might do the trick," he later added.

Most forecasters aren't expecting a dramatic stock market crash, but others on Wall Street have aired concerns that the tech sector could be overvalued and headed for a correction.

Corporate earnings also look poised to weaken later this year, Morgan Stanley's chief stock strategist said, predicting that stocks could soon see as much as a 10% pullback.