Tech stocks have led the global equity market recovery since the spring. Some argue that valuations are becoming stretched, but this doesn’t look like a repeat of the dotcom bubble in 2000.
It has been a colossal, if uneven, year for the world’s largest technology companies. The NASDAQ index, home to America’s most prominent tech names, has increased by more than 30% since the beginning of 2020, consolidating a rise of more than 400% over the past decade. And, in what’s been an extremely turbulent year for most companies, the continued strong performance of tech giants such as Apple and Microsoft have been a major reason why the headline US S&P 500 index remains in positive territory over the year to date. Apple’s share price has doubled in value in the past six months, and with the valuation of the company passing $2tn USD in August, the company is worth more than the UK’s 100 biggest companies combined.
It is not hard to see why tech stocks have done so well this year. Lockdown has caused significant changes to people’s lifestyles, and accelerated trends that were already well underway. As well as spending large amounts of time in front of their phones, computers and tv screens, people are shopping online more, storing their personal and business information remotely in the cloud, and companies are increasingly relying on data to make their business decisions. These areas were already expanding rapidly before the coronavirus lockdowns forced people to stay at home, and businesses to rapidly alter their working practices.
In a period when a large number of sectors of the economy have seen profits shrink and businesses come under pressure, tech stocks, along with pharmaceuticals and household goods, are sectors that have continued to see growth.
The rally heats up during the summer
During the summer, tech stocks enjoyed a renewed surge, with a number of additional factors contributing to the outperformance. One reason appears to be the actions of Softbank, a tech-driven investment company in Japan which took large derivative positions in seven of the most high-profile tech stocks (Facebook, Microsoft, Salesforce, Netflix, Alphabet, Adobe and Amazon). Softbank apparently carried out a series of enormous, aggressive trades, costing an estimated $50 billion, that drove up valuations during August and whipped up investor appetite.
Another reason for the rise of tech stocks during the summer, although this one is more open to speculation, is that they were due in part to the numbers of ‘day traders’ in the US. These were people who had considerably more time on their hands to play the stock markets during the summer – the high number of coronavirus cases in the US caused a number of strict lockdowns across most states – and opted to make short-term bets on tech stocks.
After the strong gains seen this year, it was, therefore, not unexpected to see some consolidation in the tech sector over recent weeks, with some profit taking in companies such as Tesla, which have enjoyed a stellar performance this year. That said, US software stock Snowflake attracted significant demand at its initial public offering in September, rising substantially above the expected offer price amidst interest from Warren Buffett’s Berkshire Hathaway. This can be viewed as a positive sign that momentum in the sector remains intact.
Are we seeing a replay of the dotcom bubble?
Some people have drawn unfavourable comparisons of the performance of tech stocks over the last year to the dotcom ‘boom and bust’ that took place in the late 1990s and early 2000s. Back then, excessive speculation and wild valuations for internet-based start-ups such as pets.com, boo.com and lastminute.com helped to cause a huge market crash that cost investors more than $5 trillion.
But one of the biggest differences between then and now is that today’s tech companies are established names, not ambitious start-ups. Even if valuations appear stretched, their popularity is based on their widespread adoption globally, and they are already making huge profits, and should these profits continue to increase over future years, current valuations may be justified.
Political headwinds ahead for ‘Big Tech’
One of the biggest issues facing tech companies is that some of them are now just too big. In the US and Europe, politicians have expressed concerns that companies such as Facebook and Amazon are too dominant in their sectors, and may have to have their activities curbed and their monopolies broken up in the interests of fair competition and stronger rights for consumers and smaller businesses. These concerns have been overtaken by COVID-19 this year, but could return and have an impact on the value of affected tech stocks now that the US presidential election has passed.
What should investors think or do?
No one can predict with any certainty what is going to happen to tech stocks in the next five years. But if you believe in the long-term case for technology companies, one of the better ways to invest is to spread the investment risk by choosing a dedicated technology fund that offers a blend of established names and future potential winners. That way, even if some of the larger tech names underperform, newer entrants could still do well. Active fund managers are well aware of the speculation over the future of tech stocks and will be positioning their portfolios to ensure they don’t rely too heavily on a concentrated pool of companies. As always, our experienced financial planners can help to find the right fund to help you take advantage of the investment opportunities out there.
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This content is for information purposes only. It does not constitute investment advice or financial advice.