Investors Beware, Nasdaq Strength May Be Last Hurrah for Stocks

(Bloomberg) -- Never mind the Ides of March, investors this spring may want to be wary about signs coming from the Nasdaq 100, according to Societe Generale SA.

The technology-heavy stock index has rebounded from last month’s correction to reach a fresh record high -- unlike the broader S&P 500 Index. Yet the gauge’s strength could indicate the late stage of the stock-market rally, according to strategists including Andrew Lapthorne at the French bank.

The strategists ran correlation analysis that suggested the current period could augur a slowdown in broader corporate earnings per share. They found that links between Nasdaq outperformance of the S&P 500 and U.S. Treasury yields tend to peak just before a deterioration in EPS growth. So the current Nasdaq outperformance raises the question whether it’s a sign of "anxiety over the fate of the economic cycle,” they wrote.

“A strong rally in the Nasdaq is often perceived as a ‘last hoorah’ for equities,” they wrote. Another potential warning sign: the Nasdaq’s market capitalization has surged to over 40 percent of U.S. gross national product, surpassing the dotcom bubble peak of 33 percent, according to SocGen.

“With the likes of Facebook and Netflix valued at over 10x sales, we are reminded of the quote from Sun Microsystems co-founder Scott McNealy in the aftermath of the tech crash,” wrote the SocGen strategists. McNealy memorably asked of investors buying his company’s stock at 10 times revenue: "What were you thinking?"

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