Tech stocks charge ahead

The pandemic has “catapulted” Big Tech to new heights, says The Wall Street Journal. Apple, Microsoft, Amazon, Facebook and Google-owner Alphabet have all reported record revenue growth in the first quarter of this year. Apple sold $47bn of iPhones during the quarter, a 66% year-on-year jump. Google’s advertisement sales rose by 32% on the year to $45bn. Combined, these five firms are now worth over $8trn, nearly one-quarter of the total value of the S&P 500.

The big five took in combined revenue of $322bn during the first three months of the year, adds Richard Waters in the Financial Times. Their joint after-tax profits soared by 105% on the year to hit $75bn. Lockdowns meant the tech giants enjoyed a superb 2020, but the conventional wisdom had been that things would return to normal this year. Instead, these numbers suggest that Covid-19 delivered an online “reset” to our lifestyles. The Big Tech firms will continue to profit from the world’s newfound “digital dependence”.

Expensive for a reason?

It’s now clear that the tech giants were a “raging bargain” when their shares fell during the early days of the pandemic, writes Eric Savitz in Barron’s. Since last March Microsoft shares have gained 85% and Apple stock has soared by 135%. The latest earnings data shows that cloud businesses are roaring (see page 22), while e-commerce continues to conquer all. Even PCs are enjoying record-breaking sales growth. Steep valuations and the growing clamour for regulation are risks, but there “are no better plays for the post-pandemic world” than Big Tech stocks.

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Tech shares were the standout market performers last year but have been adapting to the unaccustomed role of “market laggards” in 2021, says Jeran Wittenstein on Bloomberg. Investors have been rotating into cyclical sectors such as financials and industrials, which stand to gain from reopening and look far cheaper in comparison. On 41 times trailing earnings, the tech-focused Nasdaq 100 is at its priciest since 2004. The big question is whether those firms can convince investors that the huge structural shift towards digital is enough to justify such steep valuations.

The rise of Big Tech has driven the long-term outperformance of US shares. As David Brenchley notes in The Sunday Times, the MSCI USA index has gained 641% since the 2009 low; other global markets have risen by 246% over the same timeframe.

On some metrics US shares are now more expensive than at any time in history save for the eve of the 2000 dotcom bubble implosion. Some asset managers think there are still pockets of value stateside. Perhaps. But remember that as the world’s “biggest and most high-profile market”, the US is thought to be the hardest for stockpickers to beat.