Investment News: bubbly tech stocks

Yesterday, as expected, the Nasdaq set another record high. The tech-heavy index’ ratio versus say the S&P500 has broken above the former high of the dot-com bubble. I already wrote about that probability one month ago and today, that has become a fact of life. Would it be fair therefor to say that we’re back in bubble territory and that we’re close to a major breakdown?

Tech stocks strengthened by the crisis

Not so fast. While, as shown from past surveys, tech stocks are most likely still the most crowded trade. Everyone loves them and rightfully so; the COVID-19 recession has simply reinforced already existing trends like homeworking or video-streaming or on-line shopping. These all benefit tech stocks. Moreover, the big tech giants, compared to 2000, now make more revenues, have better margins and disrupt other industries on an ongoing basis thereby capturing market share.

High liquidity and low interest rates in support of tech stocks

Still, the current valuations, while less exorbitant than those of 2000, are frothy. IBES estimates for next year’s gains and P/E ratio indicate a ratio of 37 for the Nasdaq. The biggest difference however is that for long duration assets, like tech stocks, whose expected gains lie also far into the future, the DCF-valuation metric is very supportive. As interest rates are at record lows, all those future gains get discounted by extremely low discount factors. Back in 2000, 10-year US bond yields traded close to 6%, today they are below 1%.

Central Bank policies in favor of a rally

Hence, there is no telling when this rally will stop. The wall of money still looking to invest into the markets could easily push valuations to much higher levels. But it would be wrong to merely see these tech stocks performances as proof of their strong growth path. They are in fact interest plays as well. Should central banks withdraw liquidity and set bond yields 1% higher, all would fall to pieces.

US elections under the radar of investors

Another element to take into consideration is the US elections. How will corporate taxes fare? How will legislation around share buy-backs evolve and will there be renewed talk of breaking up the big tech companies?

Yesterday’s price action is said to have been triggered by strong employment data. That can very well be, but half of the job gains were linked to hotels and restaurant jobs. If the US sunbelt closes down because of record infections, a big part of those gains could be lost again. However, all in all, the saying ‘the trend is your friend’ for now still prevails.