Why Are Tech Stocks Outperforming the Market?
During the worldwide pandemic and what is considered to be the worst global recession ever, we are still seeing major tech stocks soar in value, demonstrating that there is a correlation between bad news directly impacting companies and positive rallies. Apple, for example, recently became the first company ever to reach a market cap of $2 trillion. While Disney—who in their Q2 earnings announced their first profit loss since 2001—enjoyed a profound rally, increasing their share price by an estimated 10 percent. Why is this happening?
Initially, we must consider the state of developed countries where lockdowns have decimated those economies, such as in the UK, which endured its largest contraction since 1997, suffering a 20 percent loss in just one month. But as companies struggle to operate in the face of the pandemic and localized quarantines, tech platforms like Zoom and Microsoft Teams are flourishing. They support these struggling companies in these unprecedented times by providing easily managed digital platforms that make staying connected with coworkers and customers simple, which is why we’ve seen Zoom’s share price increase by a staggering +304.64 percent from March to September 2020.
Of course, increased levels of media consumption have been a driving force as well. Streaming reached all-time highs during lockdown with the labor force confined to their homes. Services belonging to FAANG (Facebook, Apple, Amazon, Netflix and Google) have been in high demand and are one of the main driving forces behind the collective explosive growth of tech stocks.
The power of FAANG is obvious, as the collection of top tech companies occupies 15 percent of the S&P 500. FAANG has outperformed the S&P 500 massively, as the index only achieved +14.12 percent growth, whilst Facebook grew +49.26 percent, Apple +79.63 percent, Amazon +79.07 percent, Netflix +46.06 percent and Alphabet (Google) +19.39 percent (percentage growth is from March to September 2020).
However, growth is not limited to actual performance, but rather future potential and profitability. These two factors of perception are paramount to tech companies enjoying climbing share prices. This is evident by tech unicorns such as Netflix, Uber and WeWork, which all have yet to offer profits, and Tesla which only saw its first operating profit in Q3 of 2019, yet their share prices are rising steadily.
Tesla is exemplary of future potential overinflating stock value, but with good reason. Tesla has the propensity to set the product dominant design for the electric vehicle (EV) sector. While Tesla was not the first company to penetrate the EV niche within the automotive industry, they have transformed that niche into what many believe will become the industry standard, making electric vehicles fashionable. The company is leading the charge with battery tech improving the storage of electricity for renewals in a world where the price of renewable electricity production is becoming cheaper at an accelerated rate. Many companies are working on technology that enhances lithium ion batteries, with silicon technology at the forefront.
Ultimately, I believe this is occurring because of traders transitioning from bearish to bullish. Everyone is seeing tech stocks in particular rally. Thus, many investors believe they are buying these stocks at a relatively cheap price. Additionally, emotional, nonfundamental retail trading is inflating a stock market propped up by stimulus and brand recognition. With trend analysis being the most common form of stock price forecasting due to the amateur knowledge of trading, this may be reflected in the unpredictable trade movements.
As a result, I would caution investors to do their due diligence on any stocks before investing and refrain from reaction to market behavior and viral press coverage. As we have seen recently, these tech giants are starting to see the effects of a synthetic recovery and the inevitable double-dip recession. The “Minsky Moment” is here, and we have yet to see the full effects of record levels of unemployment across the developed world.
Simon Calton is the CEO of Carlton James Group, a private investment group specializing in diverse portfolios across varying global asset classes.