IMPORTANT POINTS:
- Credit Suisse’s Andrew Garthwaite warns of possible overvaluation of the US market, based on the Shiller CAPE Ratio.
- The rise of technology stocks, especially companies such as Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla, contributed greatly to this high valuation.
- Garthwaite suggested that the recent strength of earnings in the technology sector, linked to the previous weakness of the dollar, is changing, which could affect the performance of the market.
Throughout history, the United States has shown strength in the face of economic downturns. However, Credit Suisse’s Andrew Garthwaite, as reported by CNBC, suggested that the country’s conventional approach may face challenges this time around.
Analyzing the Shiller’s CAPE Ratio or PER, Garthwaite found that the US is in a worried place in terms of market valuation. He explained that, with the US representing almost 60% of the world’s stock market capitalization, it seems dangerous to think that it will continue its rise without interruptions.
The CAPE Ratio allows us to determine whether the market is overvalued or undervalued, offering us a broad perspective and taking changes into account quickly.
The Effect of “The Magnificent Seven”
One of the main reasons for this overvaluation is the outstanding performance of technology stocks. Garthwaite highlighted a group of companies, called “The Magnificent 7”: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. According to him, the US has a very high exposure to these companies, which show exceptional valuations. In fact, he suggested to his clients to reduce their exposure to US stocks.
Despite Credit Suisse’s favorable view of the technology, Garthwaite believes that maintaining the current level of price earnings for “The Magnificent Seven” will be a challenge. He emphasized that only Apple and Nvidia contributed significantly to the growth of the S&P 500 capitalization this year.
Trends and Changes in the Technology Sector
Garthwaite observes that technology, in terms of market capitalization, has reached unprecedented levels and that price-to-sales ratios seem excessive. He expected a reduction in share buybacks and noted that the previous strength of the technology sector’s profit was linked to the weakness of the dollar, a trend that has changed.
In conclusion, Garthwaite argues: “Corporate acquisitions and acquisitions have boosted the US market. If it slows down, we will see a big impact on the performance of the market in the coming months.
