Yahoo Finance

• Albert Edwards warns declining analyst optimism for US tech stocks could mean trouble.

• Historically, souring analyst optimism has led to poor stock-market performance.

• Tech-stock capitalization now exceeds dot-com bubble levels, leaving the market vulnerable, he said.

Societe Generale strategist Albert Edwards has long been skeptical that AI stocks in the US could live up to the hype surrounding them. Now, it looks like stock analysts covering the tech sector are starting to grow dubious, too.

In a client note published Thursday, the often-bearish Edwards published a series of charts that he thinks should give investors pause as stocks remain close to all-time highs. They show analyst optimism souring on tech stocks, which have underpinned the market's impressive rally — a development he said puts stocks "at serious risk."

Here are a few of them. First is the 12-month moving average of the percentage of analysts who are upgrading earnings-per-share forecasts. It's fallen from around 58% to 50% since the start of 2024, yet the Nasdaq 100 has continued its surge. Historically, downtrends like this in optimism have coincided with a dip below the Nasdaq's 200-day moving average.

"If the rapid decline in analyst optimism for the Nasdaq 100 is anything to go by, the tide is going out fast," Edwards wrote. "Indeed, it is a minor macro miracle that the index is still trading above its 200 mav let alone record highs."

There's also been a disconnect between analysts' expectations for earnings and how well earnings have fared, with reality lagging. Now, it looks like expectations are starting to turn south as trailing earnings flatten and fall short.

And estimates for the S&P Composite 1500 have started to turn downward for the first time since their ChatGPT-driven rebound.

"It is the chart below that investors should be really nervous about," Edwards wrote. "Notwithstanding the 'blips' from games played around reporting rounds, analyst optimism for the S&P 500 has been a series of lower highs and lower lows. Both the 6 and 12 month moving averages are now turning down."

Again, Edwards emphasizes, the problem with souring expectations is that investors' outlook is already at exuberant extremes, and anything that falls short of those extremes is a downside miss.

"In ordinary times this would not be a serious threat to equity investors, but it is potentially a big risk when we are at nose-bleed-high valuations and optimism."

Here's a look at how frothy the tech sector and US stocks have gotten. Tech stocks now make up a higher percentage of the market than during the dot-com bubble — which Edwards is famous for calling — and US stocks are now an exorbitant 75% of global market cap.

Plus, actual market performance tends to trend with where analyst estimates go. A worsening outlook suggests the rally could start to slow.

"If US analyst optimism is turning downward might this be enough to pull the rug from under what many see as an extremely expensive equity market, flirting with all-time highs?" Edwards wrote.

Indeed, stocks have faced a few hurdles in recent weeks that could be ongoing problems for US investors.

Chinese firm DeepSeek released a new AI chatbot in late January, threatening OpenAI's ChatGPT with its lower costs, and calling into question the vast amounts of AI infrastructure spending in the US. President Donald Trump's flip-flopping on tariff policy has also injected uncertainty into the market. And questions about the strength of the US economy have emerged this week as Walmart warned of lower expected sales and the University of Michigan's Consumer Sentiment survey showed consumers are still concerned about inflation.

Whether these are catalysts to a longer-term pullback is still unknown. Most Wall Street strategists have bullish year-end price targets for the S&P 500. But Edwards lays out a compelling list of charts investors might do well to keep their eyes on.

Read the original article on Business Insider