The Bank of England has warned that valuations of US technology stocks may be too high given the current macroeconomic backdrop and soaring interest rates.
"Given the impact of rising interest rates and the uncertainties associated with inflation and growth, valuations of some risk assets appear stretched," the boe's Financial Policy Committee said on Tuesday. "If downside risks to growth materialise, stretched valuations of risk assets increase the likelihood of a sharper correction in prices."
The boe's comments come at a time when many popular tech stocks are already trading at large premiums to the S&P 500. And right now, interest rates are near record highs and geopolitical tensions are rising overseas, creating more uncertainty for stocks.
Large-cap technology stocks were the main force behind the rally in the first half of the year, but that support has been wavering in recent months. In the past month alone, the Nasdaq 100 index, dominated by large tech stocks, has retreated more than 2 percent.
The Fed has raised interest rates 11 times since March to cool demand and curb inflation, by a cumulative 525 basis points. The target range for the federal funds rate has now risen to between 5.25% and 5.5%, its highest level since 2001.
While some tech stocks have pulled back after the recent rise in interest rates, multiples for large-cap tech stocks are still too high. Microsoft, Alphabet and Nvidia still trade at 29, 21 and 31 times earnings over the next 12 months, respectively. By comparison, the S&P 500 trades at about 18 times earnings.
The boe also noted that some measures of the risk premium for US equities remained within the lower quartiles of their historical distribution, driven mainly by the continued strength of US technology stocks.
A rare move
The boe's warning on U.S. tech valuations is quite unusual, as central bank policymakers generally do not comment on any specific market prices.
For example, then-Fed Chairman Ben Bernanke was mostly silent until the subprime mortgage crisis, the collapse of Lehman Brothers, and the 2007-2009 global financial crisis.
However, this is not the first time central banks have warned about stock market valuations, the most famous example being former Federal Reserve Chairman Alan Greenspan. In a speech in December 1996, he warned of "irrational exuberance" in U.S. stocks. Fueled by the tech bubble of the late 1990s, U.S. stocks didn't peak until more than three years after Greenspan spoke, and central bankers have mostly avoided commenting on asset values since.