Are US mega-cap tech stocks in a bubble?

One way to measure whether stocks look expensive is the price-to-earnings (P/E) ratio, which shows how much investors are paying for each dollar of profit. For example, a P/E ratio of 25x would mean an investor is paying $25 for each $1 of expected profit from a company. On its own, this measure doesn’t mean much but, compared with history and rival businesses, it is a useful metric. Since 2017, the MAG6 have typically traded on P/E ratios of 25-30x, compared with around 19x for the broader US market and about 15x for non-US developed markets.

While the MAG6 trade at a premium, these levels are not unusual by their own standards. More importantly, their premium valuations reflect structural advantages: highly scalable business models, network effects, control of vast data ecosystems, and profitable businesses like software and cloud computing. These features generate high barriers to entry, strong cash flows and the ability to reinvest in new growth areas. AI is an especially powerful driver here, as these companies are uniquely placed to embed it across their platforms and products.

Is the market too concentrated?

The MAG6 now represent more than 30% of the US’s largest listed companies. That is high, but not unusually so compared with other developed markets. History shows that concentrated markets (meaning markets where a smaller number of companies make up a disproportionately large share of the market’s total value) don’t always perform better or worse – outcomes vary. In recent years, when concentration was at similar levels, volatility (the size of market swings) and drawdowns (market declines between highs and lows) stayed broadly in line with expectations. In other words, concentration alone does not appear to add significant extra risk to US equities.

In summary, valuations for the MAG6 are elevated, but they are supported by strong fundamentals, so we don’t believe these stocks are in bubble territory yet. For long-term investors, they still offer access to powerful growth themes such as AI and digital infrastructure. Risks remain, but they are more likely to come from weaker profit growth, slower AI adoption, or loss of competitive advantages than from a simple shift in investor mood.

US earnings season wraps up

US companies have delivered another strong earnings season. With nearly all of the US’s largest listed firms having now reported, second-quarter 2025 profits are set to grow by about 12% compared with last year – more than double what analysts expected just a few months ago. Many companies beat forecasts, but share price reactions have been mixed: investors have punished earnings ‘misses’ more harshly than usual, while positive surprises have not always led to big gains. This likely reflects the fact that analysts had set expectations low earlier in the year due to trade tariff concerns.

Revenues are also improving, rising about 6% – the fastest pace since 2022. Company leaders remain confident they can manage tariff costs through price changes, supply chain adjustments and tighter cost controls. Although company profit margins have held up well so far, higher prices could squeeze both margins and consumer spending later in the year.

Positive outlook for stocks

Analysts are now upgrading – rather than cutting – profit forecasts for a larger share of US companies over the next 12 months, a sharp turnaround from April. This is often a leading indicator of stronger earnings ahead. Markets now expect profits to rise by about 10% in 2025 and 13% in 2026.

Short-term risks remain, including inflation and slower economic growth. But, into 2026, several factors look supportive of stocks: more clarity on trade, a weaker dollar, potential US Federal Reserve interest rate cuts, and modest fiscal measures such as recent tax relief.

European companies beat expectations

Europe’s earnings season ended on a stronger note than expected. By the end of June, company results showed profit growth of about 3.5% compared with 2024, much better than the small decline analysts had forecast earlier in the year.

Banks and other financial firms were once again the biggest contributors, while technology and healthcare companies also delivered strong double-digit profit growth. In contrast, carmakers, chemical companies, and consumer-facing businesses struggled.

Roughly the usual proportion of companies beat expectations, and the size of those earnings surprises was in line with history. However, investors reacted unevenly: firms that missed forecasts were punished more strongly than usual, while positive surprises often failed to translate into big share price gains.

UK inflation: What’s happening and what to watch

Meanwhile, in the UK, inflation came in at 3.8% in July, slightly higher than June’s 3.6% and a touch above expectations. This applies to both overall price rises (headline CPI) and the core measure that excludes food and energy. The result was broadly in line with the Bank of England (‘the Bank’)’s forecast, which had predicted inflation would peak around this level in the third quarter before easing back towards 3.6% by the end of 2025.

The main surprise came from airfares, which jumped 30% in a single month – the largest monthly rise on record, even bigger than during the post-Covid travel surge. This looks like a one-off, and airfares will likely fall back in the months ahead. More importantly, the Bank’s preferred gauge of underlying services inflation – which strips out volatile items such as travel – showed signs of stabilising. Food inflation was a little stronger than expected, driven by beef prices (up 25% year-on-year), while goods inflation was slightly weaker but broadly unremarkable.

November rate cut still on the cards

A mid-year bump in inflation had been expected this year due to the National Insurance rise and regulated price increases. With July’s data in line with forecasts and no sign of underlying inflation accelerating, policymakers are unlikely to change course materially. Inflation is still above the 2% target, so the Bank will be cautious. However, the overall direction still points towards more interest rate cuts, especially given signs of slowdown in private sector activity and cooling jobs market. After lowering rates to 4% in August, another cut in November remains on the cards, particularly if economic growth and employment conditions weaken further.

The outlook for inflation depends on government decisions. The autumn Budget will be key, particularly any changes to the National Living Wage. The Low Pay Commission (an independent body that advises the government) currently projects a 4.1% rise from April 2026, compared with a near 10% rise this year. If wage growth is more moderate, it should have a smaller inflationary impact – though we’ll be watching the Budget closely for measures that could shift the path of inflation into 2026.

Sector in focus: Energy

Over the past year, the global energy sector has lagged well behind the wider stock market. The MSCI World Energy Index has been broadly flat, while the broader MSCI World Index gained around 13%. This weakness reflects lower oil prices – down about 10% year-on-year – and weaker earnings from the sector.

Both oil prices and energy stocks remain highly sensitive to geopolitics. In June, tensions between Israel and Iran pushed oil prices sharply higher, with WTI crude briefly climbing above $70 a barrel due to fears over supply disruptions through the Strait of Hormuz, a key shipping route for oil. Once a ceasefire was agreed, prices and volatility quickly fell back.

Barring fresh geopolitical flare-ups, crude prices are likely to hover around $60–65 per barrel. At these levels, they are not a major risk to inflation. It would take a prolonged move above $80–100 per barrel to create meaningful inflation pressures or disrupt central banks’ plans to cut interest rates.