Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 461

Is the speculative fever in 'hot stocks’ over?

Over two years from the Covid crisis in March and April 2020 to now, the market delivered price jumps in hundreds of tech stocks followed by a harsh reality check. The reasons for the surge in prices were simple: trillions of dollars sprayed around by governments, deficit spending their way to wartime-like debts, to boost incomes, save jobs, and encourage spending.

On top of this, central banks threw away their textbooks and set about to deliberately create inflation, cutting rates to zero (negative in Europe and Japan), and resorting to straight-out money-printing, to entice people to gear up to the hilt and spend. People everywhere threw their free or ultra-cheap money at just about anything, especially online retailing, tech, renewables, ‘crypto’ currencies, ‘NFTs’, and even boring old housing.

The days of reckoning

Here is a quick snapshot of the rise and fall (thus far) of the post-Covid tech fever. Below are price charts for a couple of dozen stocks since the start of 2020 – ie just prior to the February-March 2020 Covid sell-off. At the top we start with the broad US S&P 500 and NASDAQ indexes, then several US tech/online stocks, and some key stocks in other markets, including Australia. We also include some crypto’s, including the terraUSD ‘stable coin’.

We have used no charting trickery to make price moves appear greater than they actually are. On each chart, the left scale starts at zero at the bottom, so if a price looks like it has doubled, or trebled or risen ten-fold (like Tesla and Bitcoin), or has fallen by more than half (most of them), then they have.

This is not intended to be exhaustive. It is to illustrate that the patterns are virtually the same in each case, regardless of the circumstances or merits of each individual company (or crypto).

As almost none of them pay dividends, half make losses, and most of the rest make only tiny profits relative to their prices, the charts reflect the rise and fall of mass hysteria – first surging in, and then fleeing.

Will the hysteria return to drive prices higher?

Is this just a temporary dip that will recover, or will the mass-selling continue, or pause?

Sentiment changed in early 2022, and the reasons are also clear. It was the sudden realisation that the era of free and ultra-cheap money is over. Inflation surged well before Russia’s invasion, and central banks finally started to end QE money printing, and raise interest rates back toward more ‘normal’ levels. There is much debate about exactly where ‘normal’ is for cash rates in each country, but it is certainly much higher than where they are now.

The bell at the top of the market was probably the January 2022 Superbowl, dubbed the ‘crypto Superbowl’, which featured slick ads showing famous movie stars spruiking cryptos as a sure way to get rich. (This is fitting, as the bell at the top of the late 1990s ‘dot com’ boom was the January 2000 Superbowl, dubbed the ‘dot-com Superbowl’. It featured TV ads for 14 profit-less ‘dot-com’ start-ups that promptly crashed in the 2001-2002 ‘tech wreck’).

Will central banks suddenly switch back to rate cuts and QE? Not while inflation is running well above target, unless there is another major economic contraction (deep recession with high unemployment, like the in 2020). If that does occur, share markets would have already fallen and started to rebound by then. 

On the ‘fiscal’ (government spending and taxes) front, governments are still deficit spending, but the pace of spending increases has slowed significantly, and many programs have ended. Governments are under pressure to scale back spending, and are even talking of raising taxes (eg. tax hikes in Joe Biden’s election policy agenda).

Is pricing now more reasonable?

Has the recent sell-off brought prices back down to levels that are now ‘fair’ or reasonable (or perhaps even cheap?). Here are the price/earnings ratios and dividend yields for the broad market and for our tech/online stars:

On the left, we can see that price/earnings ratios are a not-too-expensive 21 for the US market as a whole. As a general rule of thumb, a P/E ratio above the high teens is getting expensive, and is only justifiable if the company can generate and sustain above-market profit growth well into the future. Here we see that the P/E ratios of the tech and online stars are well above that in almost all cases. Half of them make losses, so they don’t even have any ‘E’ (earnings) for us to calculate the P/E.

The current high pricing relies on assumptions of continued boom-time rates of profit growth, and many of these are going to be a lot more difficult to sustain as monetary and fiscal support is withdrawn, and as higher inflation and interest rates constrain spending, revenues, margins and profits.

The right chart highlights that there is almost a complete absence of cash dividends. This is important for the broader market, as the top half dozen stocks on the list are not just large tech/online stocks. They are the largest companies in the US market, and the largest in the entire world, so they drive global returns. (Australia’s Domino’s Pizza is seen as a hot tech stock for some bizarre reason, but it is by far the biggest dividend payer).

These numbers suggest profits need to remain strong (with inflation and interest rates not rising too high) or prices have further to fall.

 

Ashley Owen is Chief Investment Officer at advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is for general information purposes only and does not consider the circumstances of any individual.

 


 

Leave a Comment:

RELATED ARTICLES

Bull and bear case for Australian equities for FY25

Why stock prices are a distraction

Gullible travels, or are Aussies more sceptical?

banner

Most viewed in recent weeks

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

Latest Updates

Shares

Why the ASX may be more expensive than the US market

On every valuation metric, the US appears significantly more expensive than Australia. However, American companies are also much more profitable than ours, which means the ASX may be more overvalued than most think.

Economy

No one holds the government to account on spending

Government spending is out of control and there's little sign that Labor will curb it. We need enforceable rules on spending and an empowered budget office to ensure governments act responsibly with taxpayers money.

Retirement

Why a traditional retirement may be pushed back 25 years

The idea of stopping work during your sixties is a man-made concept from another age. In a world where many jobs are knowledge based and can be done from anywhere, it may no longer make much sense at all.

Shares

The quiet winners of AI competition

The tech giants are in a money-throwing contest to secure AI supremacy and may fall short of high investor expectations. The companies supplying this arms race could offer a more attractive way to play AI adoption.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Infrastructure

Renewable energy investment: gloom or boom?

ESG investing has fallen out of favour with many investors, and Trump's anti-green policies haven't helped. Yet, renewables investment is still surging, which could prove a boon for infrastructure companies.

Investing

The enduring wisdom of John Bogle in five quotes

From buying the whole market to controlling emotions, John Bogle’s legendary advice reminds investors that patience, discipline, and low costs are the keys to investment success in any market environment.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.