Why are tech stocks "getting cheaper as they rise"? They rely on an 80% profit jump to support their valuations, but if AI expectations fall short, they will instantly become expensive.

It is noted that bear markets often have to wield a hammer to smash stock prices to pieces, making them cheaper. However, tech stocks have found another path. At the low point in July this year, the forward price-to-earnings ratio of tech stocks (the price investors pay for expected earnings) had decreased by about 30% compared to a year ago, a decline that had been seen during the burst of the dot-com bubble and the financial crisis. But this time, the S&P 500 index is close to all-time highs. This timing makes the situation even more bizarre. The Technology Select Sector SPDR Fund has just rebounded strongly from its low on March 30. Measured by its 45-day rate of change (the price change over the past 45 trading days), this is the strongest surge in XLK's history since records began in 1999. For the Philadelphia Semiconductor Index, only the surge in March 2000, dating back to 1994, was stronger than this one. So how can stocks soar while becoming cheaper at the same time? Lets consider a stock priced at $100 with expected earnings of $5. Investors are paying $20 for every $1 of expected profit, giving it a forward price-to-earnings ratio of 20. If the stock price rises by 40% to $140, it seems to have become more expensive. But suppose its expected earnings jump by 80% to $9. At this point, investors are only paying about $16 for each $1 of expected profit. The stock price has risen, yet it has become cheaper. A similar phenomenon is playing out across the tech sector. Over the past year, tech stock prices have risen by about 40%, while expected earnings have surged by about 80%. The growth in earnings has outpaced the rise in stock prices. Bear markets typically achieve this through pain. Stock prices plunge, economic downturns reduce profit expectations, and optimism is driven away from investors' minds. By the time the smoke clears, buyers can often purchase surviving profits at much lower prices. This helps explain why some of the strongest rebounds often start when economic news headlines still look quite bleak. The stock market begins to anticipate recovery before the economy has actually rebounded. This time, tech stocks have reaped most of the benefits without dragging the entire market into rubble. But there is an obvious way this situation could fall apart. Low price-to-earnings ratios can only hold at lower levels when these expected profits are actually realized. Major tech companies are investing heavily in chips, data centers, networks, and power. Investors are already questioning who will profit from this AI spending boom and who will be left to foot the bill. If there is oversupply in AI capacity, client spending slows down, chip pricing softens, or economic headwinds hit corporate tech budgets, analysts may start to lower these future profit expectations. At that point, this trick will reverse. Take that same stock priced at $140 with expected earnings of $9, giving it a price-to-earnings ratio of about 16. If the expected earnings are lowered to $6, while the stock price remains unchanged, the stock's price-to-earnings ratio would suddenly soar to over 23. Nothing has happened to the stock itself; it has just suddenly become much more expensive. Now, the bullish logic boils down to one thing: profits must be realized.