The bull market over the past decade has been dominated by consumer tech stocks. Facebook captured the surge in use in social media that followed the mass adoption of smart phones, while Amazon pioneered e-commerce and changed the way we shop. Meanwhile, Netflix revolutionised online content streaming. Consumers were key for the tech boom.
Research has shown that 71% of market movements are now the result of macroeconomic trends, while just 29% are the result of bottom up company specific news. When it comes to Apple’s recent market woes, Tim Cook, the company’s chief executive, would much rather pin the blame on the former.
Over the past few years the fortunes of stockpickers, be it fund managers or private investors, have often rested upon whether they have owned one or two high-flying US tech stocks.
It’s been a tumultuous few weeks for the US tech giants. Poor 2nd quarter results from Netflix and a 20 per cent drop in Facebook’s share-price were followed by impressive Amazon results and a history-making trillion-dollar market cap from Apple. What should we make of these mixed signals? Can we expect growth to continue? Or are fears of a new dot com bubble justified?
For the past few years, so called FAANG stocks (Facebook, Apple, Amazon, Netflix and Google, owned by Alphabet) have seemed unstoppable. Despite the warnings from bears that we were in a new tech stock bubble and the shares were trading far above fair price, valuations continued the rise. This year too, FAANG stocks have been the strongest performers on the US market. Indeed, without the growth of FAANG share prices, the S&P500 would be in negative territory in the first half of 2018.
It’s no secret that the past few years of spectacular performance from the US market has been led by the large technology companies. Over just the past five years (to 9 May 2018), the S&P 500 index, as measured by the SPDR S&P 500 ETF, returned a healthy 63 per cent. But compared with FANG (Facebook, Amazon, Netflix and Google) shares over the same period, the index returns were less than impressive. Google returned 139 per cent, Facebook 562 per cent, Amazon 500 per cent and Netflix 929 per cent.
Despite regulatory concerns, the US tech sector has seen some of the strongest performance in the month of May.
According to data from FE Trustnet, among Investment Association fund sectors, Technology and Communications posted the second-best performance in May, with the sector returning investors 7.84 per cent.
Disruption has become one of the most used words in modern investing. The bifurcation of sentiment and valuations among those deemed as victims and those as initiators has often become extreme.
Investor fervour to ‘be on the right side of change’ has not only driven the valuations of the perceived winners to excessive levels, it has also resulted in the overlooking of many fundamentally sound businesses.
Technology stocks have been one of the key driving forces behind the global equity bull market over recent years. In fact globally, the technology sector has trounced all other sectors over the past three and five years. Even as tech stocks like Facebook, Apple and Alphabet (Google) tower over the US equity markets, the opportunities in emerging fields such as artificial intelligence and big data appear never to have been higher.
To gauge the financial health of a company, investors look at its earnings. However, there reports are less becoming less useful.