Alberty Edwards of Societe General with his take on 2024.
It is that time of year when sell-side macro strategists make their predictions for the next 12 months. For me, there is one massive bubble waiting to burst in 2024.
The two main macro surprises for 2023 were that the widely predicted US recession failed to materialise, and China did not enjoy a strong recovery in the wake of the easing of draconian Covid restrictions.
But one ‘surprise’ did show up and set my head spinning, namely the surge in the US IT tech sector. If 2022 was a bad year for tech, hit by the double whammy of missed earnings and rising bond yields, 2023 saw ChatGPT arrive on the scene and trigger a frenzy of FOMO that even a surge in bond yields above 5% failed to stop.
Now, I acknowledge the outperformance of US ‘tech’ has very much been driven by the Magnificent 7, and that many mega-cap internet stocks are not even officially categorized by the FTSE/MSCI/S&P as ‘tech’ stocks – but that makes it all the more amazing that US tech stocks now comprise almost one third of US market capitalisation (see chart below).
So, 2024 begins with the US tech sector accounting for as much of the US broad market index as it did for a few months of madness in the summer of 2000.
Recall that until the end-2018 ‘Powell Pivot’ (the other one!), US tech was trading at only a slight P/E premium relative to the overall market, with forward P/Es in the mid-teens for both. Compare that to a current US IT 12m forward P/E of 27x vs a market at under 20x (ie a 7x premium). Yes, 27x is down from the end-2022 high of 30x, but the current 7x IT premium is as high as it ever has been, apart from the madness of the 2000 Nasdaq bubble.
I understand all the arguments as to why the current conjuncture is sustainable. I even find some of them plausible. But you know what, I’ve been doing this job for 40 years and I’ve heard it all before. So, if I had to warn of one seismic shock for 2024 that would shake investors to their core, it is not whether the US or China does or doesn’t go into recession or if inflation and interest rates are a bit higher or lower than expected. No, the biggest surprise that could send a shockwave through portfolios is the US IT market cap bubble bursting and tipping the entire US market into a slump.
