Hottest Nasdaq Run Since 2012 Gets Fuel From Tech Earnings Surge
(Bloomberg) -- Visions of last year’s FANG meltdown keeping you awake as you contemplate the longest surge in tech stocks since 2012? Relax.
Or rest easier, anyway, and be thankful for all the earnings supporting the rally. While a 2 1/2-month surge in the Nasdaq 100 qualifies as the longest in seven years and has lifted the gauge within 6.6 percent of a record, it’s coming atop a profit foundation that has reduced valuations by 20 percent.
Credit last year’s tax cut, credit demand for digital products and services, credit whatever you want. The fact is profits for U.S. computer and software makers jumped 29 percent last year, turning nosebleed valuations into relatively reasonable ones. The narrowing in price-earnings ratios is making for an especially broad rebound in the group, in which an equal-weight version of the Nasdaq 100 is outpacing the normal index by the most since 2012.
“The ‘E’ in that P/E is growing so fast that the P/E just can’t keep up,” Patrick Palfrey, equity strategist at Credit Suisse, said by phone. “More so than any other sector, the success of technology companies or the Nasdaq has come from underlying strength of business models. That’s really where technology sits -- at the intersection of corporate profit success and how much someone’s willing to pay for it.”
Despite some lackluster sessions, the Nasdaq 100 gained 0.9 percent over the last five days, pushing its string of weekly advances to 10 and boosting the rebound since Christmas to 21 percent. While the rebound has fattened price-earnings ratios to 22.7 after they hit a five-year low in December, the current valuation sits below the decade average.
And valuations look downright sturdy compared with a year ago, when they hovered above 28 times annual profits.
Worry all you want about flagging phone demand here or weakening user growth, American technology companies make gargantuan sums of money. In 2018, members of the S&P 500 Information Technology Index earned a total of $210 billion, almost twice as much as the next biggest industry, health-care.
For bulls, the risk has never been that sales and profits would stagnate. It was that their own expectations were too high. Thus, Apple had its worst run in a decade last year despite posting $261 billion in revenue. Facebook lost a quarter of its value even as net income rose 39 percent to $22 billion.
The combination of last quarter’s market rout and steadily improving economics has been a recipe for a rally.
“Technology megacaps are the most risk-on of the most risk-on stocks, and they still have some of the biggest growth aspect characteristics, and it seems that that’s what investors want,” Eric Kuby, chief investment officer at North Star Investment Management in Chicago, said by phone. “For the last 10 years, valuations have been put on the backburner, valuations have been ignored, as investors have been searching for growth.”
Earnings growth in the sector will turn negative for the next three quarters, according to analyst estimates, but that is unlikely to turn growth-oriented investors away, according to Kuby. As the yield on the 10-year Treasuries plunged to 2.7 percent from 3.2 percent in November, technology stocks became more attractive, he said.
Part of the optimism is the sector’s rebounding breadth. Stocks in the Nasdaq 100’s equal-weighted index, which treats Netflix Inc. the same as Kraft-Heinz Co., has outperformed the cap-weighted Nasdaq 100 Index for five consecutive months, the longest streak since late 2012. Logistic solutions company Xilinx Inc. and digital storage firm Western Digital Corp. have been the biggest gainers in the Nasdaq 100 since their December low.
“Earnings are re-accelerating in old tech and anything cloud related,” Gary Bradshaw, a portfolio manager at Hodges Capital Management in Dallas, said by phone. “A lot of these tech stocks obviously pulled back from last year. The Faang stocks certainly -- the Apples, Amazons, Facebooks, all of them have. But for the most part, they’ve all shown good earnings growth.”
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