- A robust jobs report last Friday and a U.S. Federal Reserve determined to tackle searing inflation could threaten to put the kibosh on the summer of tech.
- And despite recent gains, tech is still trading at just 21.2 times forward earnings.
Investors who bought the dip on some of the world’s biggest tech companies are now wondering if a recent rally is durable, or simply more evidence of a dead cat bounce.
Having rebounded remarkably in recent weeks from the bruising falls in the first half of the year, tech titans such as Apple (+0.03%), Microsoft (+0.71%), Alphabet (-0.57%), Amazon (-1.13%) and Tesla (-2.44%) have added some US$1.3 billion to their combined market cap since the start of July.
But a robust jobs report last Friday and a U.S. Federal Reserve determined to tackle searing inflation could threaten to put the kibosh on the summer of tech.
And bear market monthly rebounds of 10% or more were common during the Nasdaq Composite’s bear market in the aftermath of the dotcom bubble bursting, between 2000 to 2003.
Earnings reports for the second quarter have led to significant downward adjustments to profit forecasts for the Nasdaq 100, including a 5.5% cut for this year and a 6.5% reduction for 2023, which could translate to billions being wiped off earnings for U.S. tech giants.
But the narrative may have already shifted, from fears over inflation, to concerns over recession as evidenced by the sharp pullback in more economically exposed sectors such as consumer discretionary stocks, which have been underperforming.
If nothing else, global spending on technology is likely to remain healthy even if companies delay or cancel some projects or scale back on hiring.
Some of the biggest names in tech are already scaling down previously ambitious hiring plans, which ought to help profitability, especially given that demand for specific sectors in tech remains robust, especially cloud computing services.
But allocations to tech-focused ETFs, a closely watched bellwether of appetite for the sector, suggest that flows remain somewhat subdued.
The US$173.7 billion Invesco ETF QQQ, which tracks the Nasdaq 100, has only seen net inflows of US$99 million since the start of July, whereas ETFs that track the wider S&P information technology sector saw net outflows of US$112 million over the same period.
Cathie Wood’s Ark Innovation ETF, a darling of the pandemic and tip of the spear when it comes to investing in the tech sector, saw net outflows of around US$385 million.
But these near-term hurdles shouldn’t bog down the long-term investors looking to double down on technology stocks, because tech spending globally is likely to increase by 2% to 4% this year alone.
And persistent themes including AI, automation, cybersecurity and cloud services are likely to remain relevant for decades to come.
Valuations are also looking plenty attractive, with the S&P tech sector trading at a forward price-to-earnings multiple of 28 times at the start of January, but falling to just 19.2 by the end of June, according to Refinitiv.
And despite recent gains, tech is still trading at just 21.2 times forward earnings.