Bank of England Cautions on US Tech Stock Valuations Amidst Rising Rates

The Bank of England has raised concerns about the lofty valuations of US technology stocks,

The Bank of England considering the valuations to be potentially excessive in light of the current macroeconomic landscape and the spike in interest rates. While the US tech-focused markets, such as NASDAQ, exhibit a different investment dynamic compared to the British stock market, the Bank of England has offered insights into a sector with heightened volatility and distinct characteristics.

The Bank of England’s comments reflect a deepening analysis of the impact of rising interest rates and the uncertainties related to inflation and economic growth. It suggests that some valuations in the realm of risky assets appear stretched, heightening the risk of a more pronounced correction in prices should downside risks to economic growth materialise.

This assessment arrives at a time when numerous technology stocks trade at substantial premiums to the S&P 500, coinciding with record-high interest rates and mounting geopolitical tensions worldwide.

Even with some pullback in tech shares following the recent interest rate surge, the price-to-earnings ratios for major tech players remain elevated. Microsoft, Alphabet (Google), and Nvidia are trading at 29, 21, and 31 times next 12-month earnings, respectively. In comparison, the P/E ratio for the S&P 500 hovers around 18 times.

The Bank of England also highlights credit spreads for US dollar-denominated high-yield and investment-grade bonds, which are narrower than their euro or sterling counterparts, underlining the relative compression in US markets.

Additionally, the report draws attention to US equity risk premia, which remain within the lower quartile of their historical distribution. This phenomenon is primarily attributed to the sustained strength of the US tech sector, which continues to be a major driver of market performance.

It’s important to note that central banks traditionally refrain from offering specific market opinions. Historically, policymakers have been cautious about commenting on asset values, as they aim to maintain a neutral stance. Nonetheless, this cautious approach may not always preclude the occasional warning, as exemplified by former Fed Chair Alan Greenspan’s famous cautionary note on “irrational exuberance” in the stock market in 1996, while stocks peaked over three years after his remarks.

In recent years, NASDAQ has experienced periods of pronounced volatility, with tech stocks witnessing both peaks and troughs. The United Kingdom’s stock market, by contrast, has remained relatively steady during the same period. The Bank of England’s vigilance and its focus on transatlantic market dynamics underscore the evolving global economic landscape and the potential ramifications for asset valuations.

FXOpen offers spreads from 0.0 pips and commissions from $1.50 per lot. Enjoy trading on MT4, MT5, TickTrader or TradingView trading platforms!

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

Read this next

Retail FX

Revolut eyes Big Four auditor as board frustrated by BDO remarks

British fintech firm Revolut is reportedly considering a change in its auditing firm following a warning in its last annual accounts, as audited by BDO.

Institutional FX

Börse Group’s 360T taps Virtu for TCA and trading analytics

Virtu Financial and Deutsche Börse Group’s FX platform, 360T, have teamed up to improve the foreign exchange trading experience for their clients.

Digital Assets

Bybit Surpasses 20 Million Users Milestone Ahead of 5-Year Anniversary

Celebrating its 5th anniversary in December of this year, Bybit announced that it has surpassed 20 million registered users, highlighting its growth and position in the industry.

Digital Assets

Changpeng Zhao leaves Binance.US as SEC ramps up scrutiny

Changpeng ‘CZ’ Zhao has resigned from his position as chairman of the board for Binance.US, distancing himself from the governance of the American division of the cryptocurrency exchange.

Digital Assets

M2 granted full license to operate multilateral trading facility in UAE

Cryptocurrency exchange M2 has been approved as a fully regulated Multilateral Trading Facility (MTF) and custodian, now authorized to engage with UAE retail and institutional clients.

Digital Assets

Court approves Voyager’s $1.65 billion settlement with FTC

A New York federal judge has given the nod to a settlement that holds Voyager Digital and its former CEO, Stephen Ehrlich, accountable for misleading investors about the safety of their funds.

Retail FX

Financial Safety First: Why Regulated Brokers Are Your Best Compass

Picture yourself on the brink of the expansive financial trading universe, poised and ready to jump. But what ensures your descent into this financial abyss is controlled and secure? The unspoken hero here is regulation. It serves as a safeguard, setting rules and standards that help you navigate the market with a greater sense of security and less risk of unforeseen losses.

Industry News

Obituary: Campbell Adams, founder of ParFX and Pure Digital, passes away

Campbell Adams’ pioneering spirit and his contributions to the development of the FX industry as well as the digital asset trading space will be remembered and valued by industry peers and the broader financial community.

Inside View

Will Europe lead the way in crypto derivatives market structure?

The envisioned future market structure aims to provide direct access to regulated venues, offering 24/7 trading, lower initial margin requirements, and efficient risk management through remote custody agreements. This model is not just about addressing the current challenges but is also geared towards leveraging the best practices from the crypto markets.