Don't miss the rally, Wall Street analysts say
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Wall Street analysts are pointing to the many metrics that signal stock valuations are a concern, yet this data leads them to a counterintuitive conclusion: This rally still has legs.
Why it matters: The message for investors? Ride the wave while it's here, regardless of how expensive the market is getting.
By the numbers: Bank of America noted Wednesday that valuations are stretched on 19 of the 20 metrics tracked by the firm.
- Four of those 20 metrics are at record highs, but the market's high multiple "may be warranted," BofA wrote in a note to clients, adding that perhaps investors should acclimate to today's multiples instead of comparing them to a "bygone era."
- BofA pointed out that the S&P 500 is filled with top stocks that have lower debt-to-equity ratios than in previous decades. So let them cook! Stop worrying about how expensive they are!
- According to Goldman Sachs, median valuations sit at 31 times earnings for the biggest tech stocks today. That number was 41 in December 1999.
Between the lines: For the bulls, that's a sign that we are nowhere near the top of this rally. But the end tends to come sooner than everyone thinks.
- "If you're first, bubbles don't matter," Jay Hatfield, CEO at Infrastructure Capital Management, tells Axios.
- Over half a dozen strategists and portfolio managers tell Axios that bubbles are nothing to fear. The bigger risk, they say, is shying away from bubbles and missing the rally that comes alongside innovation.
Yes, but: When you zoom out, there are plenty of reasons to be cautious, according to Jay Goldberg, a senior analyst at Seaport who has Wall Street's only sell rating on Nvidia, per Bloomberg.
- Earnings growth is slowing for the biggest tech names that make up about 40% of the stock market.
- Six companies are set to spend about half a trillion dollars in AI capex this year, and it's unclear to what extent this spending will yield a return.
What they're saying: "I do think we are getting into bubble territory," Goldberg tells Axios.
- "It's one thing everyone's doing this, with equity and multiples are high; it's another, though, when we start taking on debt to finance some of these things," he says, referring to Oracle, which just raised $18 billion in debt.
- Circular financing, seen through Nvidia's $100 billion bet on OpenAI, gives him pause as well.
- Goldberg adds that no one from the buy side has disagreed with his sell rating on Nvidia.
What we're watching: When Wall Street gets tired of the amount of money these companies are spending.
- Right now, if companies announce cuts to AI capex, investors would likely punish them. The opposite may come true someday. The question is when.
The bottom line: The AI party might be able to continue in the near term, fueling this rally further, even if long-term questions remain.
