TMT Sector Valuation Hits 26.7x, Concerns Over Sustainability Grow

The valuation of the technology, media, and telecommunications (TMT) sector in the U.S. has reached a new high since the dot-com bubble, with a forward price-to-earnings ratio of 26.7 times, surpassing previous highs and significantly deviating from historical averages. This raises concerns about the sustainability of the current valuations and the potential for a market correction.

The high valuation of the TMT sector is driven by several factors, including strong earnings growth, low-interest rates, and investor optimism about the long-term prospects of technology companies. However, some experts are warning that the current valuations may be unsustainable and that a market correction could be on the horizon.

The TMT sector's market concentration risk has reached a historical peak. The sector's total market value in the S&P 500 index is 44.2%, approaching the historical record of 44.7% set in February 2000. The top 10 companies alone account for 33% of the index's market value. This high concentration raises concerns about the sector's vulnerability to shocks and the potential for a market correction.

Another warning sign is the increasing correlation among stocks within the TMT sector. This indicator is often seen as a precursor to market pressure, and it has risen above the long-term average. Historical data shows that a significant increase in correlation often precedes a market adjustment. The current 26-week rolling correlation coefficient average for the TMT sector is 0.49, well above the long-term average since 2010.

The TMT sector's high valuation is built on high growth expectations. The sector's forward price-to-earnings ratio of 26.7 times is 8.7 standard deviations above the average of 16.9 times from 2015 to 2019. If the "tech seven giants" are excluded from the large-cap stocks, the valuation bubble in the remaining companies in the TMT sector is even more pronounced. Excluding these giants, the sector's price-to-earnings ratio has risen to nearly 22 times in 2024 and is currently at 24.4 times, a historical high that is 11.7 standard deviations above the average from 2015 to 2019.

In contrast, the price-to-earnings ratio of the S&P 500 equal-weighted index, which excludes the impact of market capitalization, is only 17.9 times, indicating the significant pull effect of large technology stocks on the overall index. The sustainability of the TMT sector's high valuation depends on whether its earnings growth can continue to outpace the overall market. Data shows that the sector's earnings growth has been above the overall S&P 500 index since the third quarter of 2023. Market consensus expects the TMT sector's earnings growth rate to reach 11.8% in the second half of 2025, 1.8 times the overall index growth rate. However, this advantage is expected to narrow significantly in 2026, when the TMT sector's earnings growth rate is expected to be 15.5%, while the overall index growth rate is expected to be 12.3%.

As the earnings advantage of the technology sector is expected to narrow in 2026, the foundation supporting its high valuation is shaking. This could eventually lead to a shift in funds from technology stocks to other undervalued areas of the market. The current market concentration of the TMT sector is significantly higher than the average, with a market value share of 44.2% in the S&P 500 index, far above the pre-pandemic level of 33.8% and the long-term average of 26.7%. Although the initial sell-off this year temporarily suppressed its market value share, the heavier impact on the earnings of other sectors forced investors to return to technology stock trading. It is worth noting that there is a gap between the market value share and the earnings share of the TMT sector. The sector contributes 38.1% of the earnings of the S&P 500 index, but the market value share of the top companies such as the "tech seven giants" (33.2%) is significantly higher than their expected earnings contribution share (about 25%).

The increasing correlation within the TMT sector is a potential sign of an impending correction. The overall correlation of the TMT sector last hit a low in July 2021, and the previous low was in December 2017. Before these two lows, the initial differentiation in large-cap trading led to stock price adjustments about six months later. Coincidentally, the sector faced pressure in early 2025, about six months after the summer 2024 low. Currently, the average 26-week rolling correlation coefficient for the sector is 0.49, well above the low of 0.18 in 2024 and the long-term average since 2010. Historical experience shows that after the correlation hit a low in December 2017 and July 2021, the stock market experienced corrections about six months later. The correlation hit a low in the summer of 2024, and the sector faced pressure again in early 2025, further confirming this pattern.