In trying to explain the most baffling fact of the topsy-turvy markets of 2020, how tech ratings have swelled to bubbles of bubble era, even as a pandemic takes root, people are quoting two things. Federal Reserve largesse, and hopes it will contain coronavirus soon.
But another, somewhat literal theory exists about how the value of companies in the Nasdaq 100 has expanded by $ 2.9 trillion in this of all years. It is that the impact of the Covid-19 crisis, if at least the socially-distancing strictures that have forced it into the world, will prove permanent.
While not entirely accepted wisdom, it is a view that has accumulated in the minds of certain market watchers – that even if the virus is defeated, the behavior it has caused will live on. The idea is thrown after weeks like this, with the techmeter jumping more than 2% and its price-to-earnings ratio 36 rising for the first time since 2004.
“Even if things normalize post-fax, are we going back to the old way of doing things, or are we just being passed on?” said Rich Weiss, chief investor of multi-asset strategies by American Century Investments. “The digital transformation initiatives have tracked us down in the future, and that will be the way of the future. That the ratings of those companies are perhaps very fair. ”
One way to quantify how much investors expect from giant technology companies like Apple Inc. and Amazon.com Inc. have to consider how much it will take for their profit to grow ‘existing valuations’. For example, the price-to-earnings ratio of the Nasdaq 100 of 36 compared to a 10-year average of 22. Assuming tech stocks are stagnant, they would need three years’ worth of nearly 20% annual revenue growth to return multiples to get to average.
By going this logic, the market, consciously or otherwise, does more than just adapt to a brutal but brief economic disruption. After all, it has been repaid for a more profoundly changed reality – a world in which the urge to limit human interaction is graciously suppressing the old economy while hastening the rise of a digital and most automated economy.
‘We’re going to have a really difficult time right now. It has changed the way we live, ”said Kim Forrest, chief investor at Bokeh Capital Partners. “We learn how to do business in this touchless world, and technology is at the core of enabling it.”
Signs of lasting change are everywhere. Bankruptcies pile up, changing the consumer landscape. A survey by CreditCards.com found more than 40% of people who spent money on movies and events for tickets to the pandemic now plan to spend less. Half of Americans are not afraid to hit a bar, and more than one-third are not excited about sports games or movies, according to a recent survey by Bloomberg and Morning Consult.
On the other hand, Amazon had record profits in the second quarter. Apple’s products continue to sell – iPhones, iPads and Macs – to people trying to stay connected, resulting in record revenue for the June period of the company. Netflix Inc. added 10.1 million paid customers in the last four years. Wayfair Inc., whose stock has increased since mid-March, saw sales rise 84% to $ 4.3 billion.
Habits that are now forming may lead to some permanent changes, said Anat Admati, professor of finance and economics at Stanford University’s Graduate School of Business.
‘Those who work remotely put themselves into new routines – the question is, if they have a choice because the environment becomes safer, will they then switch to the old way? Most likely, some of the new habits will take shape, including because they can work better in some institutions, “said Admati.” The benefits of digital technology that allow remote working are increasingly seen clearly, and so is the enduring power of such technology. “
Technical behemoths now account for 28% of the S&P 500 and form more of the index than the next two sectors – healthcare and consumer credit combined. The top five stocks have gained as much as everyone else has lost this year, Bloomberg data to show. Apple closer to $ 2 trillion in value.
‘As long as the virus hovers over us and as long as it is believed that the virus can pass into a second wave, you will be sitting in the pockets of the market that people have more at home and where there is growth and that’s it – those tech names, including the stay-at-home tech names, ”said Quincy Krosby, chief market strategist at Prudential Financial. “That keeps people at work.”
Growing 20% per year by 2023 is much more than Wall Street analysts expect. They see Nasdaq 100 gains increase 6% annually over the next three to five years. Much may depend on growing demand for consumer products.
In Morgan Stanley’s latest poll of chief information holders published last month, planned tech spending is forecast to post a record decline of 4.4% this year. That means, according to Mike Wilson, the chief US equity strategist, much of the benefit the sector enjoyed during the pandemic lockdown was likely a pull-forward of demand, rather than a sustained acceleration – a background that could go down earn versions in the second half.
Matt Stucky, portfolio manager at Northwestern Mutual Wealth Management, said tech is a long-term part of the market.
“The majority of the value of these companies is far beyond a normal stock,” according to Stucky. “If the work-from-home environment persists, there’s probably no good reason why things should change.”
– With the help of Claire Ballentine
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