As the tumultuous year of 2020 screeches towards its end, tech investors are trying to figure out how to treat US technology stocks moving forward. After all, ever-increasing company valuations, regulatory challenges, and a revival in the fortunes of some of the market’s most beaten-down names is making the prospect of investing in new stocks less and less appealing.
While the world quite literally took a backseat over the course of this quarantine-defined year, tech and internet companies got a boost and witnessed their share prices reaching unprecedented levels.
In fact, valuation surges experienced by Apple, Amazon, and Microsoft alone were responsible for more than half of the S&P 500’s 16.6% total return as of December 16, according to senior index analyst at S&P Dow Jones Indices Howard Silverblatt.
However, tech companies haven’t exactly enjoyed the same rise in fortune in recent weeks, as the word’s attention shifted towards COVID-19 vaccines and investors started looking at energy, financials, small caps, and other underrated aspects of the market.
Such is the world’s focus on pharmaceutical companies and vaccine production that the Russell 1000 value index climbed 10% ever since vaccine data was announced back in early November. Meanwhile, the Russell growth index (which comprises largely of tech stock) only grew by 4% in the same period.
No one knows how long vaccine-producing companies will dominate the markets, but investors now have a dilemma on their hands. While tech exposure has been incredibly high this year, there is an increasing amount of doubt over the stability of the tech sector.
“I think that people are going to stick with their tech exposure but I don’t think there is going to be a lot of fresh money put into tech in the new year,” noted Lindsey Bell, chief investment strategist at Ally Invest.
When polled by BofA Global Research, fund managers termed “long tech” as the market’s most crowded trade for the eighth straight month. This makes sense when you realize that to this day, Amazon, Alphabet, and Facebook account for around 37% of the market-cap weighted S&P 500. This gives them an incredible amount of influence on the way the index (and investors’ fortunes) fluctuate, and also makes it difficult to see how investors are going to want to put their faith in this sector in the coming years.
More to the point, IBES data from Refinitiv suggests that earnings for the tech sector are expected to grow by 14.2% next year, which is much slower than the 23.2% growth rate observed for S&P 500 companies overall. Experts believe that this shift in valuation from tech to other sectors will be around in 2021 as well.
“We continue to believe that this value rotation we started to see over the last few weeks does have legs into 2021 as well,” said Mona Mahajan, US investment strategist at Allianz Global Investors.
And of course, no conversation about the tech sector’s performance this year can be complete without talking about the intense regulation that some of the big names in tech have been subjected to this year by both US and European watchdogs. Be it France fining Amazon and Google for their sneaky cookie practices or Facebook facing pressure from regulators and lawmakers, this year has not been great at calming investors’ nerves.
However, it’s also true that some tech investors are satisfied with the tech sector’s performance. If anything, they believe that the sector’s predictability is what makes it so attractive.
“There are very few sectors where you can get as predictable … growth as you can from technology,” said Mark Stoeckle, chief executive officer of the Adams Funds, whose diversified equity fund’s top holdings are Microsoft, Apple and Amazon.
At the end of the day, while the tech sector does have its troubling aspects, it doesn’t seem likely (or even sensible) for investors to turn their backs on tech entirely.
“I don’t think we are just going to move away from tech,” said Esty Dwek, head of global market strategy at Natixis Investment Managers. “These businesses have become integral parts of our lives.”
