Investors patiently waiting for tech sector valuations to collapse following last year’s stock price slide will find themselves still on hold. The sell off prompted more companies to focus on profit rather than revenue growth. But excitement around artificial intelligence gave the industry a bump. Traditional valuation metrics such as forward price-to-earnings ratios remain far above average.
The tech sector’s size means that this goes for the wider S&P 500 index too. The Shiller price-to-earnings (P/E) ratio, also known as the cyclically adjusted price-to-earnings ratio (CAPE), is a measure of inflation-adjusted earnings over the previous decade. At more than 31 it is down from the highs of late 2021 but still almost double the mean.
Enthusiasts for tech retort that innovative companies achieve high growth and so cannot be measured on traditional multiples. Companies like Microsoft and Nvidia have track records of introducing sizeable new businesses not expected by the market.