(Bloomberg) — Shares of technology companies have soared over the past few months, and valuations have hit a wall, suggesting there could be limited additional upside over the near term, according to Jefferies.
Analyst Brent Thill believes that at some point multiple expansion will run out, and that the next leg of growth has to come from fundamentals. While the backdrop for fundamentals remains strong, he wrote, expectations are elevated and investors will need to be patient in the [near term] before the ride commences again.
Last week saw results from Microsoft Corp., International Business Machines Corp., Texas Instruments Inc., Intel Corp., and Snap Inc., all of which fell in response to their reports. Jefferies cited the negative reaction to last weeks earnings as evidence for valuations having limited additional upside.
Thus far this year, the S&P 500 information technology index is up 16%, making it the top percentage gainer among industry groups. The group spiked 30% over the second quarter, its biggest quarterly gain since 2001. The overall S&P 500 is essentially flat on the year.
Read more: Runup in Tech Mega-Caps Sows Doubt Before Key Earnings
According to Bloomberg Intelligence, pockets of extremes may be developing in tech valuations. Analyst Gina Martin Adams wrote that relative valuations for S&P 500 technology companies are back near the cycle peak, although they still pale in comparison with the late 1990s.
The comments come ahead of some highly anticipated quarterly results, including from Apple Inc., Amazon.com Inc., Alphabet Inc., Facebook Inc., and Qualcomm Inc.
Apples results are especially in focus this quarter. Earlier on Monday, JPMorgan removed the iPhone maker from its analyst focus list, writing that at current valuations, investors looking for further upside have to focus on the longer-term earnings trajectory rather than expect near-term upside.
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