The Stock Market Faces Risks as Tech Stocks Soar, Warns Market Veteran

Tech Stocks in the Midst of a Speculative Bubble, Says Wall Street Veteran

Tech stocks may be experiencing their largest speculative bubble in over 40 years, according to a Wall Street veteran. Bill Smead, a market veteran and chief investment officer of Smead Capital Management, warns that the stock market is at risk of failure as investor sentiment reaches extreme levels.

Overloaded Stock Market with Limited Long-Term Returns

Smead points out that the S&P 500 is overloaded with stocks that do not offer favorable long-term returns. He compares the situation to an overcooked goose, emphasizing the narrow breadth of winners in the index. While a small group of mega-cap tech firms, known as the Magnificent Seven, have seen significant gains, the rest of the index has remained relatively flat.

Excessive Bullish Sentiment on Hyped-Up Tech Stocks

Smead suggests that the stock market is facing the biggest risk of failure in decades due to excessively bullish sentiment on hyped-up tech stocks. He highlights the current mania for Artificial Intelligence (AI) stocks and compares it to the innovation mania that peaked in 2021. Tech stocks are experiencing the late stages of what Smead describes as the biggest speculative orgy he has seen in his 43 years of stock market participation.

Warnings of a Potential Bubble in AI

Other commentators on Wall Street have also raised concerns about a potential bubble forming in AI. Richard Bernstein Advisors suggests that there is a once-in-a-generation investment opportunity in virtually everything other than the Magnificent Seven stocks. Additionally, the double-top formation of the Magnificent Seven indicates a possible reappraisal of stock prices.

Growing Bets on a Stock Market Crash

Experienced investors are increasingly betting on a stock market crash. In September, 61% of institutional investors believed that US stocks had a more than 10% chance of crashing, according to the Yale School of Management's US Crash Confidence Index. This percentage has risen from 56% in June, indicating growing concerns among investors.

In conclusion, the stock market faces significant risks as tech stocks continue to surge. The speculative bubble in tech stocks, along with excessively bullish sentiment, suggests the potential for a stock market failure. Investors should carefully consider the long-term returns of stocks and be mindful of the narrowing breadth of winners in the market.—————————————————————————————————————————————
By: jsor@insider.com (Jennifer Sor)
Title: The Stock Market Faces Risks as Tech Stocks Soar, Warns Market Veteran
Sourced From: markets.businessinsider.com/news/stocks/stock-market-crash-outlook-2024-tech-bubble-ai-artificial-intelligence-2023-12
Published Date: Tue, 05 Dec 2023 17:32:41 +0000