The Bank of Spain has warned of the danger to financial stability that a stock market correction in the share prices of large technology companies would entail, due to their high size and weight in stock market indices, especially in the United States.
The Bank of Spain’s notice is included in the autumn edition of its Financial Stability Report.
“The weight of technological leaders in terms of capitalization in the general stock market indices of the United States is very high, which increases the probability that the idiosyncratic risks of individual companies have a systemic impact,” the Bank of Spain noted in its report. .
Specifically, the supervisor has detailed that this correction could happen if adverse macroeconomic events materialize or if there is a significant downward revision of the profit forecasts of some technology companies.
Furthermore, this situation could be aggravated because some financial intermediaries, such as international investment funds, could be forced to carry out accelerated sales in times of liquidity tensions “by maintaining illiquid positions or with high leverage.
In this sense, the organization states in its report that the price-to-earnings ratio (PER) is above its historical average in both the S&P 500 and the Nasdaq 100.
Certain parallels with the “dotcom bubble”
“This situation of technology companies bears some similarities with the global episode recorded at the beginning of the 2000s, known as the “dotcom bubble.” In this period there was also a strong advance in the stock prices of technology companies, significantly higher than to that of the rest of the economic sectors,” the BdE report breaks down.
However, the organization argues that there are also “relevant differences”, such as that the PER is not so high on this occasion and that technology companies today are “consolidated.”
As an example of the sensitivity to ‘shocks’ in the financial markets, the Bank of Spain has recalled the temporary episode of tension at the beginning of August. “The initial corrections in asset prices were amplified by technical factors, such as the closure of ‘carry-trade’ operations in yen,” he detailed.
Cyber incidents
Regarding risks for credit institutions, the supervisor’s report reflects the growing concern of banks about cyber risks. This concern is framed by the growing penetration of digital technology in the sector and the potential impact of serious incidents.
In this sense, the organization has recalled the interruption of technological services that occurred around the world due to the defective update of a CrowdStrike security component. This “has been a wake-up call about the risks of the spread of incidents in highly interconnected digital service environments,” the Bank of Spain has emphasized.
Likewise, the Bank of Spain has also recalled the malicious access to a Banco Santander database, despite the fact that the stolen information did not have transaction data, which limited the impact of the incident.
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