Morgan JP Morgan Traders Warn: Risks Rise for Unprofitable Tech Stocks After 57% Increase This Year
Taylor Wilson
Unprofitable tech stocks surged 57% year-to-date, with a 27% spike in May alone. JPMorgan is calling this the "spiciest part" of the tech trade, urging a rotation toward profitable quality names — with bond yields staying elevated and valuations stretched, the speculative rally's risk is compounding fast.
How big is the rally — and how far ahead of the market?
Goldman Sachs' basket of unprofitable tech companies — a tracked group of tech firms with no earnings — rose 27% in May alone, beating the Nasdaq 100 by 17 percentage points, the strongest single-month outperformance since November 2020.
The S&P 500 is up just 11% year-to-date. The unprofitable tech basket is up 57%. The gap is stark.
This means → the most speculative slice of the market has gained more than 5× the broad index. Historically, divergences this wide tend to appear at the most euphoric — and most dangerous — stages of a rally.
Who is buying — retail or institutions?
Nationwide chief market strategist Mark Hackett notes the unprofitable tech basket and the retail-investor favorites basket have moved almost in lockstep since early April.
In plain terms = this is not a retail-only frenzy — institutions are in too, both chasing "maximum leverage exposure on the way up."
The basket includes satellite navigation firm NextNav, small AI company BigBear.ai, and drone maker Unusual Machines — the last one more than doubled in May.
Why is JPMorgan sounding the alarm now?
JPMorgan market intelligence head Andrew Tyler warns: bond yields may stay elevated → that hits stocks with no earnings support hardest.
This means → the higher rates go, the less "future profits" are worth in today's dollars — and unprofitable tech stocks are priced almost entirely on that future promise.
Tyler adds that large profitable tech companies' share buyback activity "supports a rotation toward quality." In plain terms = companies spending real cash buying back their own stock are a safer bet than companies selling a story.
Could these stocks actually fall once they start earning?
Hackett flags a counterintuitive risk: these companies' share prices may drop once they turn profitable.
His words: "Ironically, most companies see their stocks fall once they start making money, because now the market has something real to value."
This means → in the unprofitable phase, price is set by imagination — the sky is the limit. Once real earnings arrive, valuation gets "anchored," and the bubble deflates.
Does the rate risk stop at unprofitable tech?
Seaport Global chief equity strategist Jonathan Golub extends the rate risk to the entire tech sector: large tech companies are borrowing heavily to build AI data centers.
Even semiconductor and hardware firms that are not directly borrowing become more rate-sensitive because their customers' debt loads are rising.
JonesTrading strategist Michael O'Rourke sums it up: "The tech rally itself is reason for caution. Unprofitable tech just pushes that risk to a higher level."
What is the strategists' consensus?
Mission Wealth senior portfolio manager Kieran Osborne: "There will be winners and losers among these companies, and the two are often very hard to tell apart."
The core message across multiple strategists is the same: do not read the recent surge as a signal of long-term appeal.
In plain terms = a steep rally does not equal quality. Now is the time to rotate from speculative names toward companies with more certain earnings.
Content is for reference only, not financial advice.