August 8, 2025 • 9 mins
The world's biggest technology companies have reported another period of strong earnings, adding to the recent rally in their share prices. Microsoft became only the second company to reach a $4 trillion valuation. Some market watchers are concerned that the valuations of the so-called Magnificent Seven companies are looking stretched. Gina Martin Adams, Chief Equity Strategist at Bloomberg Intelligence, joins host Stephen Carroll to discuss.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:08):
I'm Stephen Carol and this is Here's Why, where we
take one news story and explain it in just a
few minutes with our experts here at Bloomberg.
Speaker 1 (00:19):
Microsoft became the second company in the world today to
hit a four trillion dollars market cap, alongside Nvideo.
Speaker 2 (00:24):
This is after reporting earnings that beat Wall Street's expectation.
This AI revolution, it's in his next major growth. It's
Goldiewox for tech. These are trillion dollar companies and they're
managing to post for Meta more than twenty percent growth,
much ahead of expectations and singling it's going to be
twenty five percent potentially for the next quarter. Isn't that extraordinary?
Speaker 1 (00:44):
We have companies that valuable growing at that run rate.
Speaker 2 (00:47):
It's been another bumper earning season for the world's biggest
tech firms. Silicon Valley seems to have shrugged off the
economic uncertainty, reporting strong revenues and planning more massive spending
on artificial intelligen Investors have cheered most of the reports,
but amid the optimism, some key market watchers are starting
to voice concerns about whether the tech stoc rally has
(01:09):
gone too far. Here's why big tech's soaring valuations have
some worried Gina. Mark Adams, chief equity strategist at Bloomberg Intelligence,
joins me now for more. First of all, Gina, big
tech names doing well feels like a story that we've
been telling for years. What's driving the strength in the
(01:30):
sector right now.
Speaker 1 (01:32):
So if you go back to the summer of twenty
twenty four, I think it starts to sort of paint
the picture for you as to what's really happening with tech.
At that point in time, valuations were reaching new peak levels,
but also earnings growth was peaking out, and we started
to see earnings growth accelerate in the latter part of
twenty twenty four. In early twenty twenty five, with that
(01:52):
deceleration and earnings momentum inside the tech space, we started
to see valuations rationalize a little bit, came back down
to around twenty times forward earnings, a little bit higher
than twenty times forward earnings, but at the very least
we were sort of off of those what we thought
were unsustainable peaks and experiencing some tech companies effectively growing
(02:15):
in to their valuation multiples. And then the tariff turmoil hit,
and what became very clear in the second quarter is
tech companies are still experiencing steady growth while the rest
of the market is experiencing a accelerating growth rate due
to tariffs and uncertainty economic uncertainty affiliated with tariffs. So
(02:40):
the natural byproduct of that is capital flows right back
to tech, even though we're not seeing necessarily a reacceleration
in that tech growth pace. In order to drive that
capital back, we're seeing damage emerge to the non tech
segments that wasn't anticipated at the start of this year,
and that's create this rotation that's favorable for tech.
Speaker 2 (03:02):
But why is that, I suppose a problem. If people
are seeing strength in the company and they're seeing something
that's worth putting their money into it, why do we
have warnings, like from Michael Harten's statement Bank of America
that they're worried now about the stritch of valuations.
Speaker 1 (03:16):
Well, I think it's mostly because valuations have reached that
new peak level. So the tech sector specifically, if you
look at tech and communications together, which is kind of
how we think about tech, you're looking at valuation multiples
that are at all time highs, even higher than they
were in the peak in the market in twenty twenty one,
even higher than they were in twenty twenty four. They've
(03:36):
accelerated to levels that we're looking at near thirty times earnings,
So very clearly what has happened is this concentration of
capital has flooded into the space absent any other perceived
opportunities inside the rest of the S and P five
hundred for the most part, and even though the companies
are earning very strongly and earning even better than analysts
(04:00):
had anticipated, which is helping to create a short term
flight back to the segment, their earnings momentum is still decelerating.
So what you have is a slower and slower pace
of earnings growth that is continuing to emerge. These companies
are facing higher and higher expectations even though their earnings
are decelerating, which creates a little bit of friction, creates
(04:23):
a little bit of risk because as earnings are decelerating,
the companies are most vulnerable to a potential disappointment. Right,
we know that capex spending peaked last year, and we
know that even though they're still spending at a very
robust pace, we're still past that peak. The tech sector
is really interesting because the cycle is really meaningful to
driving relative performance typically, and I think this is what's
(04:46):
creating the problem for strategists at this time is the
cycle very clearly is not necessarily working in tech's favor
because we had that peak in earnings growth and in
sales growth. We are decelerating off that peak. Even though
the relative growth rate is stronger than the rest of
the index. We are in that deceleration mode, and that
creates a foggier environment for investing in tech then the
(05:07):
environments say we were in twenty twenty three and twenty
twenty four, where earning's momentum was persistently improving, and that
was a very clear case for why tech should lead.
We're just in a messier market, is the best way
to describe it. It doesn't necessarily mean that all is lost
and you know, you should just dump all of your
tech exposure, but it is a bit of a concerning
(05:29):
market because valuations are so high and momentum is slowing.
Speaker 2 (05:32):
What's the risk? Where As we'd be looking for the
perspective to things to go wrong, especially.
Speaker 1 (05:37):
The risk is and this doesn't appear to be playing
out in the short term. So I have to say
in the second quarter, for the most part, the companies
have been able to satisfy expectations, have been able to
suggest that growth rates are going to sustain themselves into
the future. But the real risk is that that doesn't happen.
At some point in the next quarter or two, that
a tech company or a few tech companies will say, oh, actually,
(06:01):
we are seeing some real deceleration in demand from our customers,
or we are seeing a deceleration in capex emerge. We've
passed peak capital spending cycle and the migration in the
AI cycle from infrastructure spending cycle to the manifestation of
AI in actual business process. Maybe that doesn't go so smoothly, right,
(06:26):
and we have to price different outcomes. I think that
what is happening in tech right now is we're pricing
close to ideal scenarios, and if anything emerges that is
less than ideal, that makes the sector somewhat vulnerable to
short term weaknesses.
Speaker 2 (06:42):
Do we have a good example of when this has
happened in the past, perhaps in a different sector, that
might give us an idea of what that could look like.
Speaker 1 (06:49):
Yeah, the most representative example, and I hesitate to bring
it up because it will create a lot of hate mail.
Is probably the tech bubble, okay, And I want to
be very careful to clarify that, you know, no bubble
works out the same. Sure, every mini bubble is different.
This bubble is different in that there is actual earnings
(07:10):
growth affiliated with these companies, which is naturally going to
make it manifest. Any kind of deflation of that bubble
will manifest a bit differently than the tech bubble did.
But if you think back to the late nineteen nineties,
it again was all about we've got to invest for
the future. The future is going to be magnificent. We're
going to invest a tremendous amount of capital and infrastructure
(07:30):
and laying pipe everywhere. This is now we're laying AI
pipe everywhere effectively, right. But nonetheless, when we moved from
that initial infrastructure investment to the long term benefits of
having the Internet and on everybody's desktop and ultimately everybody's phone,
the run rates of growth were significantly slower than investors
(07:52):
had priced over the long term. There were also quite
a few companies at that point that weren't making any
money and had nothing to do with tech that investors
were still in investing in so it was a different
scenario than it is today, but at its fundamentals, there
are two things that are similar. The one big thing
is that infrastructure is the investment right, and when you're
in the early stage investment on infrastructure, your growth pace
(08:15):
is extraordinary. Investors start pricing in the prospects for that
infrastructure to have meaningful impacts all the way down the chain,
you know, right through to the healthcare companies and consumer
companies that are going to benefit from at that point
having Internet and now having generative AI. So the concern
(08:35):
is how much then do we price and are we
pricing too much growth and too rapid AI proliferation? Because
of course the Internet as it emerged became a very
long term term driver of productivity. I think you know,
you would argue it did ultimately have very positive long
term impacts, but we had priced such extraordinary circumstances. There
(08:58):
was no way for the company fund mentals to be
able to achieve those expectations in such a compressed period
of time. They did achieve magnificent progress, but over a
long period of time at slower growth rates than we're priced,
and that's very possibly what we're facing with AI now
is we're pricing extraordinary growth almost immediately, and we probably
(09:20):
will get very meaningful change, but maybe it'll take a
little while to actually manifest itself in real growth, real
change to productivity, real economic conditions.
Speaker 2 (09:30):
Okay, Gina, thank you very much. Geena Martin Adams, our
chief equity stratchist at Bloomberg Intelligence. Thank you. For more
explanations like this from our team of three thousand journalists
and analysts around the world. Go to Bloomberg dot com
slash explainers. I'm Stephen Carroll. This is here's why. I'll
be back next week with more. Thanks for listening.
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:08):
I'm Stephen Carol and this is Here's Why, where we
take one news story and explain it in just a
few minutes with our experts here at Bloomberg.
Speaker 1 (00:19):
Microsoft became the second company in the world today to
hit a four trillion dollars market cap, alongside Nvideo.
Speaker 2 (00:24):
This is after reporting earnings that beat Wall Street's expectation.
This AI revolution, it's in his next major growth. It's
Goldiewox for tech. These are trillion dollar companies and they're
managing to post for Meta more than twenty percent growth,
much ahead of expectations and singling it's going to be
twenty five percent potentially for the next quarter. Isn't that extraordinary?
Speaker 1 (00:44):
We have companies that valuable growing at that run rate.
Speaker 2 (00:47):
It's been another bumper earning season for the world's biggest
tech firms. Silicon Valley seems to have shrugged off the
economic uncertainty, reporting strong revenues and planning more massive spending
on artificial intelligen Investors have cheered most of the reports,
but amid the optimism, some key market watchers are starting
to voice concerns about whether the tech stoc rally has
(01:09):
gone too far. Here's why big tech's soaring valuations have
some worried Gina. Mark Adams, chief equity strategist at Bloomberg Intelligence,
joins me now for more. First of all, Gina, big
tech names doing well feels like a story that we've
been telling for years. What's driving the strength in the
(01:30):
sector right now.
Speaker 1 (01:32):
So if you go back to the summer of twenty
twenty four, I think it starts to sort of paint
the picture for you as to what's really happening with tech.
At that point in time, valuations were reaching new peak levels,
but also earnings growth was peaking out, and we started
to see earnings growth accelerate in the latter part of
twenty twenty four. In early twenty twenty five, with that
(01:52):
deceleration and earnings momentum inside the tech space, we started
to see valuations rationalize a little bit, came back down
to around twenty times forward earnings, a little bit higher
than twenty times forward earnings, but at the very least
we were sort of off of those what we thought
were unsustainable peaks and experiencing some tech companies effectively growing
(02:15):
in to their valuation multiples. And then the tariff turmoil hit,
and what became very clear in the second quarter is
tech companies are still experiencing steady growth while the rest
of the market is experiencing a accelerating growth rate due
to tariffs and uncertainty economic uncertainty affiliated with tariffs. So
(02:40):
the natural byproduct of that is capital flows right back
to tech, even though we're not seeing necessarily a reacceleration
in that tech growth pace. In order to drive that
capital back, we're seeing damage emerge to the non tech
segments that wasn't anticipated at the start of this year,
and that's create this rotation that's favorable for tech.
Speaker 2 (03:02):
But why is that, I suppose a problem. If people
are seeing strength in the company and they're seeing something
that's worth putting their money into it, why do we
have warnings, like from Michael Harten's statement Bank of America
that they're worried now about the stritch of valuations.
Speaker 1 (03:16):
Well, I think it's mostly because valuations have reached that
new peak level. So the tech sector specifically, if you
look at tech and communications together, which is kind of
how we think about tech, you're looking at valuation multiples
that are at all time highs, even higher than they
were in the peak in the market in twenty twenty one,
even higher than they were in twenty twenty four. They've
(03:36):
accelerated to levels that we're looking at near thirty times earnings,
So very clearly what has happened is this concentration of
capital has flooded into the space absent any other perceived
opportunities inside the rest of the S and P five
hundred for the most part, and even though the companies
are earning very strongly and earning even better than analysts
(04:00):
had anticipated, which is helping to create a short term
flight back to the segment, their earnings momentum is still decelerating.
So what you have is a slower and slower pace
of earnings growth that is continuing to emerge. These companies
are facing higher and higher expectations even though their earnings
are decelerating, which creates a little bit of friction, creates
(04:23):
a little bit of risk because as earnings are decelerating,
the companies are most vulnerable to a potential disappointment. Right,
we know that capex spending peaked last year, and we
know that even though they're still spending at a very
robust pace, we're still past that peak. The tech sector
is really interesting because the cycle is really meaningful to
driving relative performance typically, and I think this is what's
(04:46):
creating the problem for strategists at this time is the
cycle very clearly is not necessarily working in tech's favor
because we had that peak in earnings growth and in
sales growth. We are decelerating off that peak. Even though
the relative growth rate is stronger than the rest of
the index. We are in that deceleration mode, and that
creates a foggier environment for investing in tech then the
(05:07):
environments say we were in twenty twenty three and twenty
twenty four, where earning's momentum was persistently improving, and that
was a very clear case for why tech should lead.
We're just in a messier market, is the best way
to describe it. It doesn't necessarily mean that all is lost
and you know, you should just dump all of your
tech exposure, but it is a bit of a concerning
(05:29):
market because valuations are so high and momentum is slowing.
Speaker 2 (05:32):
What's the risk? Where As we'd be looking for the
perspective to things to go wrong, especially.
Speaker 1 (05:37):
The risk is and this doesn't appear to be playing
out in the short term. So I have to say
in the second quarter, for the most part, the companies
have been able to satisfy expectations, have been able to
suggest that growth rates are going to sustain themselves into
the future. But the real risk is that that doesn't happen.
At some point in the next quarter or two, that
a tech company or a few tech companies will say, oh, actually,
(06:01):
we are seeing some real deceleration in demand from our customers,
or we are seeing a deceleration in capex emerge. We've
passed peak capital spending cycle and the migration in the
AI cycle from infrastructure spending cycle to the manifestation of
AI in actual business process. Maybe that doesn't go so smoothly, right,
(06:26):
and we have to price different outcomes. I think that
what is happening in tech right now is we're pricing
close to ideal scenarios, and if anything emerges that is
less than ideal, that makes the sector somewhat vulnerable to
short term weaknesses.
Speaker 2 (06:42):
Do we have a good example of when this has
happened in the past, perhaps in a different sector, that
might give us an idea of what that could look like.
Speaker 1 (06:49):
Yeah, the most representative example, and I hesitate to bring
it up because it will create a lot of hate mail.
Is probably the tech bubble, okay, And I want to
be very careful to clarify that, you know, no bubble
works out the same. Sure, every mini bubble is different.
This bubble is different in that there is actual earnings
(07:10):
growth affiliated with these companies, which is naturally going to
make it manifest. Any kind of deflation of that bubble
will manifest a bit differently than the tech bubble did.
But if you think back to the late nineteen nineties,
it again was all about we've got to invest for
the future. The future is going to be magnificent. We're
going to invest a tremendous amount of capital and infrastructure
(07:30):
and laying pipe everywhere. This is now we're laying AI
pipe everywhere effectively, right. But nonetheless, when we moved from
that initial infrastructure investment to the long term benefits of
having the Internet and on everybody's desktop and ultimately everybody's phone,
the run rates of growth were significantly slower than investors
(07:52):
had priced over the long term. There were also quite
a few companies at that point that weren't making any
money and had nothing to do with tech that investors
were still in investing in so it was a different
scenario than it is today, but at its fundamentals, there
are two things that are similar. The one big thing
is that infrastructure is the investment right, and when you're
in the early stage investment on infrastructure, your growth pace
(08:15):
is extraordinary. Investors start pricing in the prospects for that
infrastructure to have meaningful impacts all the way down the chain,
you know, right through to the healthcare companies and consumer
companies that are going to benefit from at that point
having Internet and now having generative AI. So the concern
(08:35):
is how much then do we price and are we
pricing too much growth and too rapid AI proliferation? Because
of course the Internet as it emerged became a very
long term term driver of productivity. I think you know,
you would argue it did ultimately have very positive long
term impacts, but we had priced such extraordinary circumstances. There
(08:58):
was no way for the company fund mentals to be
able to achieve those expectations in such a compressed period
of time. They did achieve magnificent progress, but over a
long period of time at slower growth rates than we're priced,
and that's very possibly what we're facing with AI now
is we're pricing extraordinary growth almost immediately, and we probably
(09:20):
will get very meaningful change, but maybe it'll take a
little while to actually manifest itself in real growth, real
change to productivity, real economic conditions.
Speaker 2 (09:30):
Okay, Gina, thank you very much. Geena Martin Adams, our
chief equity stratchist at Bloomberg Intelligence. Thank you. For more
explanations like this from our team of three thousand journalists
and analysts around the world. Go to Bloomberg dot com
slash explainers. I'm Stephen Carroll. This is here's why. I'll
be back next week with more. Thanks for listening.
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