The Bank of England recently warned that some US technology stocks may be overvalued given the current macroeconomic environment.
• The Bank of England recently warned that some U.S. technology stocks may be overvalued
• Central banks rarely give concrete assessments of the market in order to maintain neutrality
• UK banks and the financial system remain resilient
BoE warns of risk from US tech stocks
As the Bank of England explained in a recent report, valuations of US technology stocks may be overvalued given the current macroeconomic situation. The Fiscal Policy Committee (FPC) note said: “Given the impact of higher interest rates and uncertainties surrounding inflation and growth, valuations of some risky assets appear to be stretched.” Excessive valuations of risky assets would therefore increase the likelihood of a larger price correction if the downside risks to growth materialize, explains the FPC.
As CNBC explains about the committee’s report, the Bank of England’s comments come at a time when many popular tech stocks are trading significantly higher than the S&P 500, while interest rates are near record highs and geopolitical tensions are rising Continue to increase abroad. Although the price-earnings ratios of stocks such as Microsoft, NVIDIA and Alphabet have weakened somewhat recently following the recent interest rate hike, the values are still at 29, 31 and 21 times next 12-month earnings, respectively. Meanwhile, the S&P 500’s price-to-earnings ratio is around 18x. “And some measures of US equity risk premiums remained well in the lower quartile of their historical distribution, largely due to the continued strength of the US technology sector,” the FPC added. The general risk environment remains challenging and the short-term growth prospects remain subdued.
Pressure on US markets
The bank also points to credit spreads on US dollar-denominated high-yield and investment-grade bonds being tighter than their euro or sterling counterparts. This underlines the relative pressure on the US markets. According to financefeeds, it should also be taken into account that central banks traditionally do not provide specific assessments of the market. Historically, policymakers have tended to be cautious when it comes to assets as they strive for neutrality. Nevertheless, this cautious approach does not preclude occasional warnings, such as the famous warning from the former Fed chairman Alan Greenspan in 1996, faced “irrational exuberance” in the stock market, even though stocks peaked more than three years after his comments.
There have been periods of significant volatility on the NASDAQ in recent years, with technology stocks experiencing both ups and downs. In contrast, the British stock market remained relatively stable during this period. The Bank of England’s attention and focus on market dynamics in the transatlantic region highlights the changing global economic landscape and the potential impact on asset valuations.
British financial system remains resilient
The FPC also concluded that UK banks, as well as the wider financial system, remain resilient. “The FPC continues to believe that the tightening of credit conditions in the UK is due to a changing macroeconomic outlook, rather than defensive measures taken by banks to protect their capital positions. In deciding on the level of the UK’s countercyclical capital buffer in light of its valuation Given the financial vulnerability and resilience of the UK banking system, the FPC has decided to maintain the UK countercyclical capital buffer rate at 2 percent.” However, the Committee will continue to closely monitor developments in order to be able to change the rate of the countercyclical capital buffer (a risk management tool) in either direction according to the development of economic and financial conditions, underlying vulnerabilities and the general risk environment.
Editorial team finanzen.net
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