Investors would be “naive” to think the US tech stock rally can continue forever, experts have warned, as “clear threats” to the sector linger on the horizon.
Yesterday evening (August 19), technology giant Apple became the first US company to reach a $2tn (£1.53tn) valuation — just two years after it hit a $1tn market cap.
It follows the ongoing success story of US tech stocks over the past few years, their growth buoyed by the coronavirus-induced lockdown that hamstrung other companies.
But investors have been warned the pace of earnings growth was unlikely to be sustainable.
Jason Hollands, managing director at Tilney, said: “It would be naïve to think such valuation expansion can continue forever and wrong to extrapolate recent pace of earnings growth during the pandemic as sustainable.
“As investors start to gain confidence in the recovery, attention could recalibrate to more traditional cyclical sectors and so we might see a bit of rotation out of these parts of the market as investors take profits.”
Ben Yearsley, investment consultant at Fairview Investing, agreed, saying there were “clear threats on the horizon” for the tech and US markets.
He said: “If Joe Biden wins then there are two threats: a greater change or a break up of big tech and the Trump corporate tax could get reversed to some degree. You need to watch politics closely this year.”
However, Mr Yearsley added tech was still likely to be higher and more valuable in a decade so he was “happy to sit tight”.
Others thought the classic tech stocks were more likely to face headwinds from other companies within their remit.
Zehrid Osmani, global portfolio trust manager at Martin Currie, said some of the ‘Faangs’ business models faced potential risks related to competition, reputation and disruption.
He added: “We find opportunities to be exposed to the ecosystem these dominant companies operate in, but through different parts of the supply chain.”
Tech backers
There are those who still believe there is “plenty of room" for US tech stocks to continue growing, however.
Neil Campling, head of TMT at Mirabaud Securities, said he “would not be surprised” if we saw more headlines around a $2tn club over the next few months, claiming Microsoft and Amazon were poised for similar moves.
He said: “US large cap tech’s merry march has been driven by a perfect storm of factors…[and] while these dynamics continue there is no reason to think that the party is over.”
Darius McDermott, managing director at Chelsea Financial Services, agreed. He said US tech was one of the “few areas of genuine growth in the market”.
Mr McDermott added: “In many cases tech markets have now matured enough so that companies dominate their particular niche but still have plenty of room for growth.
“This is the ideal combination to grow margins and profits quickly.”
Success story
The Fang+ index — which includes Facebook, Apple, Amazon, Alphabet (Google’s parent company), Netflix, Twitter, Tesla and Alibaba — is up 63 per cent year-to-date after nearly doubling (up 97 per cent) from its March low.
