Nvidia, Meta, Google, Microsoft, and other giant tech stocks have one important challenge coming up
The do-or-die challenge for the tech bulls? A series of hot financial results and outlooks to match three months of hot stock price gains.
"I anticipate that the quality of earnings from these [large cap tech] companies will continue to be strong, but their ability to move their valuations to move higher and higher, completely unfettered, certainly is likely to be challenged here in the next couple of quarters," New York Life Investments chief markets strategist Lauren Goodwin said on Yahoo Finance's Opening Bid (watch above).
New York Life Investments has more than $800 billion in assets under management (AUM).
Goodwin cited cost challenges and trade uncertainty as risks to the sizzling tech trade headed into the second half of the year.
Unfettered tech valuations have been the modus operandi for the large-cap tech space of late.
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High-profile tech names in Alphabet (GOOG, GOOGL), Meta (META), Nvidia (NVDA), and Microsoft (MSFT) have advanced an average of 35% in the past three months, according to Yahoo Finance analysis. The top two performers are AI darlings Nvidia and Meta, which have logged respective gains of 52% and 41%.
The four giant tech stocks have an average forward price-to-earnings (PE) multiple of 30 times, well above the S&P 500's (^GSPC) 22 times. Meta, Nvidia, and Microsoft's forward PE multiples are above their three-year averages, while Alphabet's is slightly below.
Large-cap tech's strong rally extends beyond the household names in the "Magnificent Seven" complex.
For instance, Broadcom (AVGO) is up 57% in the past three months, pushing its valuation multiples to some of the highest levels in five years. The same situation extends to Uber (UBER) after a 25% stock price increase in the last three months.
Nowhere has the rush to drive up large-cap valuations been more evident than in Nvidia.
On Wednesday, the company's market cap stood at nearly $4.2 trillion amid enthusiasm about its AI chips flowing back into China soon.
"The AI Revolution is just hitting its next stage of growth," crowed tech analyst Dan Ives of Wedbush, epitomizing the enthusiasm in the space.
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But others eyeing the tech trade are beginning to echo Goodwin's more measured tone when putting money to work at higher valuations.
"We note that the recent rally in large-cap tech and AI stocks has been fueled mainly by price-to-earnings (P/E) multiple expansion," Ulrike Hoffmann-Burchardi, global head of Equities for UBS Financial Services, pointed out. "While we remain structurally bullish on AI, we would prefer to see further gains underpinned by upward earnings-per-share (EPS) revisions rather than valuation expansion alone."
She added, "Pockets of elevated valuations across leading AI companies, ongoing geopolitical uncertainty, and the upcoming second-quarter earnings season all point to the need for a balanced and selective approach. We recommend investors seek diversified exposure across semiconductors, software, and internet platforms, rather than concentrating risk in any single segment or individual stock."
Brian Sozzi is Yahoo Finance's Executive Editor and a member of Yahoo Finance's editorial leadership team. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email brian.sozzi@yahoofinance.com.
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