The stock market remains at an all-time high. However, many analysts and market observers are starting to question aloud how much longer the current rally can last? In a recent analysis, investment bank Morgan Stanley (NYSE:MS) notes that U.S.-based hedge funds have started ditching American equities and shifting capital into European stocks. Hedge fund exposure to Europe has grown from below 17% at the end of 2023 to roughly 19% currently, says Morgan Stanley.
The move into European stocks comes amid growing concerns that U.S. equities have become too expensive. Europe’s main STOXX 600 index is up 6.5% so far this year, lagging the 10% gain in the benchmark S&P 500 index. The S&P 500 index currently trades at 21 times forward earnings estimates, while European equities are trading at 14 times, according to data from Bank of America (NYSE:BAC).
The lower valuation is drawing capital to foreign markets and away from U.S. stocks. Should the trend continue, U.S. markets could deflate in the coming months. There are also concerns that pockets of the market are becoming overheated, particularly related to artificial intelligence and among some mega-cap technology stocks. Here are three tech stocks to sell ASAP before the bubble bursts.
Reddit (RDDT)
Social media company Reddit (NYSE:RDDT) just went public and the stock is flying high, having gained 92% since last week’s IPO. While the stock has come out of the gate strong, its fundamentals don’t justify the momentum and the share price is likely to come crashing back to earth once the company issues its first quarterly financial results. RDDT stock could also crash if retail investors who’ve been pumping it up suddenly sell.
It’s important to remember that Reddit, which has been in business since 2005, remains unprofitable. The company relies on online advertising for revenue and volunteers for content on its various message boards. RDDT stock is also getting some added attention from the “Wall Street Bets” forum that it owns and operates.
In no time at all, it is likely that RDDT stock will reverse lower, especially if the current market rally falters. Proceed with caution.
Trump Media & Technology Group (DJT)
Trump Media & Technology Group (NASDAQ:DJT), which is owned by former President Donald Trump and operates the Truth Social app, just went public through a special purpose acquisition company (SPAC) merger with shell company Digital World Acquisition Corp. The company competes directly with X, formerly known as Twitter. As with Reddit, DJT stock had a strong market debut, rising as much as 50% during its first day of trading.
However, also like Reddit, there are some red flags with DJT stock that investors should be aware of. As outlined by Barron’s, the company is losing money, its financials and user metrics are hazy at best, Donald Trump, who owns 58% of the company, spends most of his time posting on rival X, and Trump could dump the stock in the near-term to help pay his mounting legal bills. These issues should not be taken lightly by investors. If a stock market bubble bursts, it’s a safe bet that this stock will fall hard.
Super Micro Computer (SMCI)
Super Micro Computer’s (NASDAQ:SMCI) stock has run up 260% year to date and has gained 824% in the past year. It’s the top-performing stock in the S&P 500 index right now. If a bubble bursts and the market falls, it’s safe to assume that SMCI stock will come tumbling down. The stock is also growing increasingly volatile, rising 6% one day and falling 5% the next. Some days the stock jumps 20% on no news.
The huge bull run and volatility should make investors weary of SMCI stock. While it might be a stretch to say that it is a meme stock, Super Micro Computer has certainly benefitted from the hoards of retail investors who have flocked to it as a leading AI play. Some analysts claim the stock is legitimate and a contender. Analysts at JPMorgan Chase (NYSE:JPM) recently slapped an “outperform” rating on the stock and a $1,150 price target, implying more than 10% upside from current levels.
Still, SMCI stock looks overheated after such a blistering run and could be vulnerable if market sentiment turns for the worse. Investors should definitely be careful with this one.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.