Tech Haters Schooled in Risk of Valuations as Timing Tool
(Bloomberg) -- Bears on the biggest computer and internet companies were sure their time had come last week, when the Nasdaq 100’s worst plunge since March sowed certainty the group’s nose-bleed valuations finally spelled its doom.
Now markets have brought a lesson in the risks of that kind of conviction.
The tech-heavy gauge climbed more than 2% for a second day Thursday, extending a winning streak that wiped out last week’s rout. Apple Inc., Microsoft Corp. and Amazon.com Inc. each jumped at least 3%, sending the benchmark to a two-month high. Up almost 10% for the week, the Nasdaq 100 is poised for the best performance since April.
The swift recovery in tech, which follows bubble warnings from the likes of hedge fund manager David Einhorn, shows how hard it is to get market timing right when it is premised mainly on valuations. Price-earnings ratios approaching 40 on the Nasdaq 100 tempted bears eager to cash in when the group stumbled. They were thwarted when bets on a divided government sent investors back into the arms of the market’s most reliable earners.
“You can’t fight the fundamentals on it,” said Alicia Levine, chief strategist at BNY Mellon Investment Management. The sector is “growing earnings and margins so much more quickly. That’s where the economy is really growing.”
The rally is a return to the dynamics that have driven markets for much of the year as investors sought out companies believed to be most resilient to the pandemic. Now, the fading odds of both the White House and Congress coming under Democratic control has dimmed the prospects for a massive fiscal-aid package, making tech stocks more appealing than companies that depend on strong domestic demand.
Treasury yields have fallen this week while economically-sensitive small-cap shares underperformed, a reversal from October, as traders pared back growth expectations. The ProShares UltraPro Short QQQ, an exchange-traded fund that makes a leveraged bearish bet against the Nasdaq 100, has tumbled 25% this week.
Computer hardware and software makers proved winners this year thanks to their ability to cater to stay-at-home demand. Tech firms in the S&P 500 saw their profits expand 2.6% in the third quarter, according to reported results and analyst estimates compiled by Bloomberg Intelligence. That compared with an 11% drop for the broad market.
The results from Tuesday’s election, in which Democrats’ chances of winning the Senate looked small, also reduced the odds of an increase in capital-gains taxes that could have prompted investors to sell tech winners to avoid higher levies in the future. Since the start of the year, the Nasdaq 100 has surged 38%, almost five times the gain in the S&P 500.
“The reflation trade unwinding, the lower prominence of big policy changes like taxes and regulation and the move of interest rates lower are all supportive of tech stocks,” said Lauren Goodwin, economist and multi-asset portfolio strategist at New York Life Investments. “A return to growth in defense in equities is pretty prominent.”
The resurgence was bad news for tech skeptics like Einhorn, the president of Greenlight Capital, who told clients last week that the firm started adding bearish wagers in an industry where he sees an “enormous” bubble. A Goldman Sachs basket of the most-shorted tech stocks jumped more than 3% Thursday, essentially amounting to losses for short sellers.
Caution toward tech stocks was building in the run-up to the election. Hedge funds retreated from the group, with exposure sitting at multimonth lows, according to data compiled by Morgan Stanley’s prime-brokerage unit. Last month, investors pulled almost $3 billion from the Invesco QQQ Trust, the biggest ETF tracking the Nasdaq 100. That was the largest withdrawal in more than a year, data compiled by Bloomberg show.
With the pandemic raging and the path of the economic recovery uncertain, it’s hard not to see tech stocks as the best option, according to David Mazza, head of ETF product at Direxion Investments.
“Investors may want to take a step back and consider where growth will be in the near term with the lack of a near-term stimulus,” Mazza said. “Valuations remain rich, but earnings continue to be strong.”
©2020 Bloomberg L.P.