(Bloomberg) -- Heightened inflation fears are threatening to do something to computer and software makers that hasn’t happened in two decades: make them the worst stocks in the market.They haven’t, however, made them anything close to cheap. With a three-week drubbing of the Nasdaq 100 Index showing no signs of easing up, a few analysts are asking what happens if super-high valuations in companies like Alphabet Inc. and Facebook Inc. revert and drag everything back to average levels?You almost don’t want to know the answer.According to Leuthold Group, the S&P 500 Index is at risk of falling 37% should its multiples to sales and earnings return to their mean levels since 1995, a starting point picked to capture a broad upward shift in valuations.The tech giants known as the Faamgs could face a similar fate, according to Bloomberg Intelligence’s Gina Martin Adams and Michael Casper. In their model, the group’s premium over the market could shrink by another 24% if it goes back to the mean over the seven years before the 2020 pandemic.To be sure, these calculations are more exercises than predictions, intended to show how stretched prices have become after years of relentless tech gains. Valuations like those explain the market’s hair-trigger volatility lately, as every economic report is combed for its implications on Federal Reserve policy.It’s a reason Leuthold’s core portfolio this week trimmed its equity holdings by 3 percentage points to 55%.“With our cap-weighted S&P 500 valuation work looking nearly as extreme as it did at the tech bubble peak, we certainly could have elected to take even more chips off the table,” said Doug Ramsey, Leuthold’s chief investment officer, adding that the firm refrained from turning more bearish because more stocks were participating in the latest advance.The anxiety created by stretched valuations is on display all over. As surging commodity prices and a tightening labor market sparked concern inflation could persist and force the Federal Reserve to roll back its stimulus sooner than expected, richly-valued technology stocks sold off, driving the Nasdaq 100 toward its worst month since the start of the pandemic in March 2020.At the same time, the specter of rising interest rates makes elevated multiples harder to justify. A basket of unprofitable tech firms has plunged 37% from its February peak.Read more: Hedging Gets Frantic as Puts Soar Amid Stock Market HammeringTech megacaps such as Microsoft Corp. and Apple Inc. are examples of how sentiment may be shifting. Both saw mediocre share reactions to strong earnings reports.While the Faamg group has seen its price-earnings multiple shrink from its peak, it still fetches a 24% premium relative to the rest of the S&P 500. That compared with a P/E spread of just 7.3% five years ago, according to data compiled by Bloomberg Intelligence.“The Faamg bubble is deflating and should continue to do so as risk-tolerance heals and investors position for sustainable recovery,” said Martin Adams at Bloomberg Intelligence. “Valuations have dropped, but there is room for the group’s premium to fall.”For years, one pillar of support for equity valuations has been the rock-bottom interest rates that the Fed put in place to spur growth. Now, as the economy reopens, many investors see the only path for rates is up. That’s a problem, because relative to bonds, stocks are already less attractive than any time in a decade.Based on a methodology sometimes called the Fed model, the S&P 500’s earnings yield -- how much profits you get relative to share prices -- is about 1.7 percentage points above the yield on the 10-year Treasuries. That’s close to the smallest advantage since 2010. Should 10-year yield climb to 2%, the S&P 500 would have to fall by 8% to keep the equilibrium, all else equal. The 10-year yield recently sat near 1.7%.Valuations are never a great timing tool as expensive stocks can get even more expensive. Yet for many tech stocks, the recent rout hasn’t made them cheap and yet the momentum is turning against them.“We would like to buy tech -- we think it’s fundamentally a great sector -- but we need to buy it at more attractive prices,” said Kevin Caron, portfolio manager for Washington Crossing. “We may have reached the point where momentum can only take the group so far, and we are now pushing up against the limits of valuations. It’s hard to say it’s fully been washed out.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.