Tech Stocks Are Doing Great. Pain Is Everywhere Else

Scratch the surface of the latest stock rally, and investors remain steadfast in their conviction that real life isn’t returning anytime soon.

The best companies over the past month are, once again, those that win from people continuing to shop online and work remotely. Big tech won’t stop gobbling up record market gains while stocks which usually do well when economic expectations recover, like small-caps and value names, keep struggling despite the return of animal spirits on Wall Street.

The mega caps are becoming an indicator of defensive positioning, while riskier corners struggle. It’s a trend that’s been playing out over and over again.

On Thursday, as stocks fell amid a resurgence in virus cases, tech held up better than the overall market. The Nasdaq 100 was down 0.5% as of 11:29 a.m. in New York, versus a 1.4% slide in the S&P 500.

Tech Stocks Are Doing Great. Pain Is Everywhere Else

Runup in Tech Mega-Caps Sows Doubt Before Key Earnings Reports

“Much stems from tech’s new role as a utility -- something consumers and businesses simply can’t live without,” Lei Qiu, a fund manager overseeing tech stocks at AllianceBernstein, wrote in a note. “These necessities have become even greater as the pandemic increased the need for remote shopping, learning and working.”

All that means recent gains in shares have almost entirely been driven by mega-cap tech. The Nasdaq 100 Index is up 7.4% since June 8. In contrast, an equal-weighted version of the S&P 500, in which Apple Inc. counts as much as American Airlines Group Inc., lost 12% since then.

Investors are navigating the second wave of the pandemic and expect consumers will be more reliant than ever on web services and door-to-door delivery. And with the volatile earnings season approaching, technology companies are bound to deliver better results than other sectors.

Tech Stocks Are Doing Great. Pain Is Everywhere Else

Technology -- traditionally considered a cyclical sector -- is also moving more like a defensive asset. The beta of S&P 500 technology stocks -- a measure of how sensitive a sector is to broad market moves -- has dropped near the lowest since 2014.

Real estate and utilities, both traditionally considered defensive, have seen their betas spike above 1 in the recent crisis, meaning that they swing around even more than the S&P 500.

But just because mega-cap tech is working for investors now doesn’t mean it’ll stay that way. Valuations in the tech-heavy Nasdaq are rich, and investors could snap back to cheaper, growth-sensitive stocks once the latest virus flare-up subsides.

Inflated valuations could prompt investors to tire of large-caps and look farther afield, creating “a broader equity participation that would lead some of the smaller and cheaper companies to perform better,” Andrew Sheets, Morgan Stanley’s London-based head of cross-asset strategy, said in an interview with Bloomberg TV.

“There’s rarely been a more extreme gap between what the market’s paying for what it considers the best highest quality companies and what the market is paying for the rest,” he said.

Regime Shift

Jeroen Blokland, the head of multi-asset strategy at Robeco, wants to buy value stocks but is holding off until the economic data points to a stable recovery.

“We do think that some kind of regime shift will happen and will give value a chance to outperform,” he said in an interview from Rotterdam.

Technical metrics indicate there’s a pullback coming soon in technology stocks, according to Michael Purves, who runs Tallbacken Capital Advisors in New York. He cited data showing the Nasdaq 100 is now 19% above its 150-day moving average, an extreme level that’s usually followed by a correction.

However, the safety that technology companies with their stable earnings could prove irresistible to investors.

“A dip seems likely, but the ability for the market to buy that dip also appears especially likely,” said Purves.

©2020 Bloomberg L.P.

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