Global IT stocks have provided refuge against Europe’s debt crisis, with the Nasdaq is up 126 per cent since March 2009.But Societe Generale analyst Alain Bokobza and his team say there are three reasons to worry about Nasdaq:
Growth projections are too optimistic
The 46 per cent earnings growth forecast for the next three years is too optimistic given concerns about the global economy and since return on equity on IT stocks is already at an all-time high.
Moreover, Bokobza and his team believe analysts have very similar forecasts on earnings growth, which is a worrying sign because historically there has always been a sharp correction in stocks. Given all this profit warnings are likely.
Nasdaq looks expensive
Like other safe haven assets the Nasdaq looks expensive. Technology, media and telecom stocks have fully recovered from the 2008 crisis which isn’t the case for the rest of the market. Relative to the rest of the market IT stocks are trading at 10-year highs.
Slowing capital expenditure
U.S. capital expenditure lost tax incentive support, and corporate demand for IT goods and services is likely to slow. This is a problem as”a fading corporate investment cycle has always been a lead indicator of bad news on Nasdaq.”
The IT sector accounts for 16.4 per cent of the U.S. equity index, compared with 8.9 per cent of the global equity index. The high exposure of the U.S. market to IT sector—from 45 per cent two years ago to 96 per cent now—explains the high correlation between Nasdaq and the S&P 500 indexes.