Growth stocks struggled earlier in 2021. The main concern among investors was that inflation could start spiraling out of control if the Fed didn’t dial back on its policy of easy money. However, as investors started easing up on their worries, we’ve started to see growth stocks, especially those in the tech world, skyrocket in value once more. Amidst what’s currently a bullish market for tech stocks, one Wall Street analyst is sounding the alarm bells right now.
Wells Fargo analyst Chris Harvey doubled down on his bearish outlook on high-flying tech stocks, warning that a “day of reckoning” is ahead for the industry. In particular, he’s recommended long-term investors cash out of their positions now, especially if interest rates start rising in the future. The main concern is that growth stocks remain quite highly valued at the moment, and an increase in interest rates will hurt the future growth projections that these tech stocks rely on to justify their valuations.
“The premium that you’re paying is still exceptionally high. We believe that premiums has got to compress. Two, we think that the next 25 basis point move in the 10-year [Treasury Note yield] is up, not down,” said Harvey in a CNBC interview. “The tech companies and the growth companies that are selling at very high multiples…even though they have high growth rates, the high multiples are what’s going to do them in.”
Harvey’s statements come as the stock market continues to touch all-time highs. In particular, the tech-based Nasdaq closed on Friday at 14,639.33, the highest seen in the index’s history. Compared to March 2020 low, the Nasdaq has gained more than 120% during that period of time.
However, while he expects tech stocks to plummet in value in the near future, Harvey remains optimistic about the general market as a whole. Despite major indexes trading near all-time highs, the general consensus is that the economy still has a lot of room to grow as things return to their pre-pandemic state. It’s only cyclical industries, especially those in overpriced sectors, that will see a correction in the near future, according to this one analysts’ perspective.
Another analyst, David Roche, said over the weekend that he also considered tech stocks to be a risky investment right now. In particular, he singled out Chinese tech stocks, many of which have fallen under scrutiny recently from the Chinese government. The most notable of which include the Chinese ride-sharing giant Didi (NYSE: DIDI). Regulators in the country have stepped up scrutiny on the company, having even suggested to the company to delay its recently-held U.S. IPO.
While not an outright order from the government, some shareholders are worried Didi will face backlash from the CCP for having gone ahead with its U.S. listing. Other Chinese-tech companies that have been targeted recently include Alibaba, which fell under harsh scrutiny from the CCP following comments made by its founder, Jack Ma.
Other outstanding risks for non-Chinese tech stocks include antitrust cases, which have been in the works for years now from U.S. and EU-based regulators. Additionally, there’s the possibility that some of these big tech companies will be split up. Amazon (NASDAQ: AMZN) is one company that this could happen to, with its Amazon Web Services business and its popular online retail website being prime candidates for a split.