A chief strategist says watch this signal to know when to get out of high-flying tech stocks
It’s not time to leave the AI-fueled tech party just yet, one chief investment strategist says.
Chris Konstantinos of RiverFront Investment Group said in a client note last week that he remains overweight on tech stocks for the time being, as valuations are in check and profit margins are strong.
For example, the tech sector’s forward PE ratio is at around 23-times earnings, compared to around 40-times near the dot-com peak. Meanwhile, tech profit margins are at 26% today versus about 13% in 1999.
RiverFrontInvestmentGroup
“In the late 1990s, technology stocks were priced for perfection, on top of fundamentals that were anything but perfect,” Konstantinos wrote. “You’re paying a lot less in 2026 for better businesses.”
While the tech sector is enjoying robust fundamentals for the time being, the hype around the AI trade is undeniable. So, how do you spot a bubble if one emerges?
Konstantinos said the warning signal he’s watching is cash flow. Specifically, if a split starts to develop between the tech sector’s reported earnings before taxes and interest, and its free cash flow levels. In other words, how much money is coming in versus how much the company actually keeps.
He called it the “single most important early warning signal for when an equity bubble may burst.”
Today, reported earnings and free cash flow levels are keeping pace with each other, while that stopped being the case around 2000, at the top of the dot-com bubble.
RiverFrontInvestmentGroup
The chart, Konstantinos said, “tells us that tech’s reported earnings are being validated by actual cash coming in the door.”
He added: “Until that relationship inverts, we believe the fundamentals support staying invested in mega-cap, high cash flow tech shares.”