This post was originally published on this site
https://i-invdn-com.akamaized.net/news/LYNXNPEE8J1FR_M.jpg
Technology and internet stocks tumbled on Friday, extending a recent downtrend, after results from the likes of Apple Inc (NASDAQ:AAPL)., Amazon.com Inc (NASDAQ:AMZN). and Facebook Inc (NASDAQ:FB). failed to live up to investors’ expectations. While all three reported results that beat estimates by some measures, they weren’t seen as strong enough to justify the lofty valuations that the shares have reached.
“After pandemic-linked growth gains so far this year, we think that it has become more difficult for megacap tech to surprise on the upside,” Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a research note. Valuations for large-cap technology companies appear “fair at current levels given expected earnings growth,” he said.
Megacap technology stocks have been the standouts in the S&P 500 Index this year, rallying more than 20% in the best showing among 11 main industry groups, while the broader market rose less than 1%. Even as much of the economy struggled against shutdowns and broad economic weakness, big tech thrived as the pandemic accelerated longstanding shifts toward online retail, cloud computing and digital advertising.
Gina Martin Adams, Bloomberg Intelligence’s chief equity strategist, points out that technology stocks have been “derating relative to the S&P 500 since early September,” which she says has been driven by fundamental trends that are likely to continue to pressure them.
The price-to-earnings premium for tech stocks relative to the S&P 500 is 20%. And even excluding the largest companies, the sector trades more than two standard deviations above average, according to BI’s analysis.
“This is fine when tech is producing much stronger earnings growth than the S&P 500, as it has this year, but things could change in 2021,” Adams wrote on Friday. “Tech is expected to produce about 16% EPS growth, vs. 25% for the S&P 500 — a differential that could continue to work against tech stocks.”
Earlier this week, investor David Einhorn wrote that tech stocks are in an “enormous” bubble, one that “has already popped,” with the September peak serving as the top. The head of hedge fund Greenlight Capital cited lofty valuations, market concentration in a small group of stocks, and mania in IPOs as signs of a bubble.
©2020 Bloomberg L.P.
