Sometimes things just don’t make sense.
The degree to which some tech stocks have rallied in 2020 is one of them.
Now, don’t get us wrong, there are a lot of reasons for the markets to be up, and a lot of reasons to be optimistic about the future. But at some point, things just don’t make sense anymore and you have to call it out.
The Tech Valuation Bubble
A lot of the companies in the tech sector have gone from being fundamental growth stories that persisted through the Covid-19 slump, to being stocks with more than a bit of euphoria and price momentum. The irrational decoupling of stock prices from reality like what Tesla TSLA -9% (TSLA) has experienced for years is now starting to take place in the tech sector more broadly.
For example, in the last two weeks Apple AAPL -8% is up almost 10% - and given its size, that’s a huge number in terms of market cap. When a company worth $2 trillion like Apple goes up 10% - that implies that it’s created $200 billion in new value in a week!
For some context, $200 Billion is approximately double what a big name company like Boeing BA -3.4% is worth, and is approximately 4 – 5 times what a big name companies like General Motors GM -4.8% or Walgreens WBA -0.2% are worth.
Salesforce CRM -4.2% is a similar story; it beat earnings earlier this week, which is great – it’s an awesome company. But the company rallied and gained almost $50 billion of market cap the day earnings were reported; $50 billion is a lot of money! Yes, Salesforce is beating expectations, but they did they really create the equivalent of a whole new General Motors or Walgreens in terms of new value or production over the course of the last few weeks?
Understanding Market Breadth
Now, to be clear, we think Salesforce and Apple are great companies and really great examples of how innovation continues to drive the US economy. They have great products, great management, there are a lot of reasons why they deserve to be valued highly. But the run up in share prices doesn’t seem to be based on their fundamental business practices anymore.
Call it euphoria, call it momentum, call it a bit of FOMO from investors, there are a lot of different ways to look at it, but right now a few big technology names are seeing their prices run higher day after day, and they’re lifting the whole market up.
As a result of the run up in technology share prices, the S&P 500 is back into positive territory for the year and is setting new all time highs. This is happening even as most of the companies in the S&P 500 are actually in negative territory for the year.
Generally this kind of narrow market breadth, where a few companies are up and most are down, is not considered very healthy for the market.
Think of it like this – if the S&P 500 represents the US economy then each of the companies within the S&P represents a different part of the economy. Some companies deliver packages, some companies refine gasoline, some companies fly people to different cities, etc. If most of the companies are doing poorly, that suggests that a significant portion of the country isn’t doing so well either. If the country’s economy isn’t doing that well, then usually you see overall markets struggle.
How Healthy Is The Economy?
The good news here is that the economy is getting healthier and markets are forward looking. Even though most of the stock market’s companies are still languishing and struggling, the underlying economy is starting to improve.
Spending is rebounding from the lows of the Covid quarantines and companies are starting to be more optimistic in their forecasts. Furthermore, we’re getting more and more good news around Covid-19; every week we’re getting new headlines about vaccines, new therapies, or other ways we’re innovating to improve the situation.
Plus, it looks like there’s going to be more stimulus coming down the pipe to help the American consumer – that’s good for the economy and should also be good for financial markets.
What It Means For Investing
As much as we love technology, it’s hard to see the big tech companies continuing to run higher without the rest of the economy catching up a bit first.
That means that if you’re looking for opportunities for new money, take some time to look at airlines, hotels, casinos, refineries, the companies that serve the parts of the economy that haven’t recovered yet.
It also means that you should be careful and intentional about how you do your investing in technology. Some of the companies deserve their rich valuations and high multiples; they’re great businesses that are going to continue to grow – but at these levels you have to be careful and know what you’re buying if you don’t want to get burned.
This Article Source is From: https://www.forbes.com/sites/greatspeculations/2020/08/28/are-apple--salesforce-blowing-a-tech-bubble/?fbclid=IwAR1BkXXD6mqyPD_GjpN0Ce7N8xgDDin4uwzUbaG0PEq24Jg1iXpgoALek1k#7fe4ac9f5dfc
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