Is the technology rout over?

“The worst of the post-pandemic hangover is fading” for Big Tech, says Meghan Bobrowsky in The Wall Street Journal.

Technology shares became overheated during the first 18 months of the pandemic as the world rushed to work online; tech firms “believed their own hype and over-expanded” says Tom Stevenson in The Telegraph. Reopening and rising interest rates proved a tough wake-up call last year.

Between March and December 2022 Amazon’s shares lost half their value, while Apple’s market cap slipped from $3trn to $2trn. But Big Tech has bounced back: just five tech stocks are responsible for 66% of the S&P’s 8% rise so far this year. The tech-focused Nasdaq 100 index has surged by 22% since 1 January, while Facebook-owner Meta has vaulted by 87%.

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The US equity market is once again dependent on the fortunes of a handful of giant businesses.

First quarter reassures

Alphabet, Amazon, Meta and Microsoft recently reported first-quarter revenue growth rates of 3%-9%, say Richard Waters, Elaine Moore and Patrick McGee in the Financial Times. That is “a far cry from two years ago” when the lockdown boom “boosted Big Tech’s combined revenue by 41%”. But it was still an improvement from poor fourth-quarter levels, as cloud computing demand and PC sales slumped. The results have reassured investors that the tech rout is over.

“Global digital advertising spend is holding up” better than feared, says Lex in the same paper. Margins have been improved by “heavy cost-cutting via lay-offs”, while investors are excited by the “tantalising prospects from artificial intelligence” (AI).

The race for AI won’t be cheap. One estimate suggests AI spend will hit $800bn over the next ten years. That will only grow the gap between the tech giants that have the cash to splurge on aggressive research and smaller firms “such as Zoom and DocuSign” whose shares “remain in the doldrums”. “Companies can’t cut their way to prosperity,” says Tae Kim in Barron’s.

Rebound rebuttal

This year’s tech lay-offs risk improving margins today at the expense of revenue growth tomorrow. After dipping last year, valuations are once again eye-watering: “Big Tech stocks are trading at 20 to 70 times 2023 earnings while growing at single-digit rates – not a good combination for future returns.”

America’s Nasdaq index has rebounded 20% from its 2022 low, prompting some to talk of a new bull market, says Russ Mould of AJ Bell. Yet it remains 24% below its 2021 peak. The rally is reminiscent of the 2000-2003 bear market, during which the index staged nine separate rallies.

Yet the Nasdaq didn’t get back to its March 2000 peak until 2015. “It is highly unusual for the leaders in the last bull market to be the leaders in the next one.” Tech investors should “proceed with caution”.