People walk outside the Bank of England in the City of London financial district, in London, Britain, January 26, 2023.
Henry Nicholls | Reuters
Valuations for U.S technology stocks may be too high given the current macroeconomic backdrop and spike in rates, according to the Bank of England.
“Given the impact of higher interest rates, and uncertainties associated with inflation and growth, some risky asset valuations appear to be stretched,” the BoE’s financial policy committee said Tuesday. “Stretched risky asset valuations increase the likelihood of a greater correction in prices if downside risks to growth materialise.”
The comments from the Bank of England come at a time when many popular technology stocks trade at a sharp premium to the S&P 500, as rates sit near record highs and geopolitical tensions mount abroad.
Even after a pullback in some technology shares following the recent climb in rates, the price-to-earnings ratios for Microsoft, Alphabet and Nvidia sit at 29, 21 and 31 times next-twelve-month earnings, respectively. By comparison, the PE for the S&P 500 sits at roughly 18 times.
“[C]redit spreads for U.S. Dollar-denominated high-yield and investment grade bonds were more compressed than their Euro or Sterling equivalents,” the BoE said.
“And some measures of U.S. equity risk premia remained well within the lower quartile of their historical distribution, driven primarily by the continued strength in the U.S. tech sector,” the report added.
To be sure, this isn’t the first time that a central bank has warned of valuations over the years, but as a general rule, central bankers would rather not offer an opinion on any specific market price. Former Fed chair Ben Bernanke, for example, was mostly silent in the run-up to the subprime mortgage crisis, the collapse of Lehman Brothers and the Global Financial Crisis in 2008.
The most famous exception was former Fed chair Alan Greenspan, who warned of “irrational exuberance” in the stock market in a speech in Dec. 1996. Fueled by the tech bubble of the late 1990s, stocks didn’t top out for more than three years after Greenspan’s remarks and, ever since, central bankers have mostly avoided commenting on asset values.
— CNBC’s Scott Schnipper contributed reporting
