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Bank of England warns U.S. tech stock valuations may be out of whack

People walk outside the Bank of England in the City of London financial district, in London, Britain, January 26, 2023.

Henry Nicholls | Reuters

Valuations for U.S technology stocks may be too high given the current macroeconomic backdrop and spike in rates, according to the Bank of England.

“Given the impact of higher interest rates, and uncertainties associated with inflation and growth, some risky asset valuations appear to be stretched,” the U.K. central bank’s financial policy committee said Tuesday. “Stretched risky asset valuations increase the likelihood of a greater correction in prices if downside risks to growth materialise.”

The comments from the Bank of England come at a time when many popular technology stocks trade at a sharp premium to the S&P 500, as rates sit near record highs and geopolitical tensions mount abroad.

Even after a pullback in some technology shares following the recent climb in rates, the price-to-earnings ratios for Microsoft, Alphabet and Nvidia sit at 29, 21 and 31 times next 12-month earnings, respectively. By comparison, the PE for the S&P 500 sits at roughly 18 times.

“[C]redit spreads for U.S. Dollar-denominated high-yield and investment grade bonds were more compressed than their Euro or Sterling equivalents,” the Bank of England said.

“And some measures of U.S. equity risk premia remained well within the lower quartile of their historical distribution, driven primarily by the continued strength in the U.S. tech sector,” the report added.

To be sure, this isn’t the first time that a central bank has warned of valuations, but as a general rule, policymakers would rather not offer an opinion on any specific market price. Former U.S. Federal Reserve Chair Ben Bernanke, for example, was mostly silent in the run-up to the subprime mortgage crisis, the collapse of Lehman Brothers and the global financial crisis of 2007-2009.

The most famous exception was former Fed chief Alan Greenspan, who warned of “irrational exuberance” in the stock market in a speech in December 1996. Fueled by the tech bubble of the late 1990s, stocks didn’t top out for more than three years after Greenspan’s remarks, and ever since central bankers have mostly avoided commenting on asset values.

— CNBC’s Scott Schnipper contributed reporting.

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