Many of the big tech stocks that fell drastically out of favor last year are now rising at twice the pace of the stock market in 2019. Shares of companies such as Facebook Inc. (FB), Netflix Inc. (NFLX), Alibaba Group Holding Ltd. (BABA), Rakuten Inc. (RKUNY) and Naspers Limited (NPSNY), have posted returns over 25% year-to-date (YTD), compared to the broader S&P 500’s 10.8% increase. Meanwhile, four tech stocks—Microsoft Corp. (MSFT), Facebook, Apple Inc. (AAPL) and Amazon.com Inc. (AMZN) —accounted for roughly 12% of the S&P 500’s total advance in the first two months of the year, according to S&P Dow Jones Indices. These tech titans were four of the five biggest contributors to the index’s gains during that period, per The Wall Street Journal.
“Big tech is looking far more interesting now than it has any time over the past year,” said Jim Tierney, chief investment officer of U.S. concentrated growth at AllianceBernstein. Investors and analysts cite at least five key forces driving up techs, per the table below.
Why Big Tech Stocks Are Back!
- Shares are cheaper, more attractive after Q4 plunge
- Fed has become more dovish
- Tech giants reporting strong, record profits while S&P 500 earnings decelerate
- Many big techs companies still trade below their 2018 highs
- Tech rally has more conviction now compared to momentum-driven rushes in the past
- Sector looks less “crowded” than in 2018
As global growth decelerates, a rally in tech has attracted the attention of many market watchers. Booming profits in tech have attracted investors back to the sector which saw trillions in market value lost during a selloff in the final quarter of 2018.
The fourth quarter nosedive slashes valuations and overcrowding in many of the major names in tech, making them more attractive. As prospects for the larger market become increasingly lackluster, “if you can find companies that can grow a heck of a lot faster, they’re looking attractive,” said Mr. Tierney.
Stocks Trading Below 2018 Records
Despite the recent rebound, many big tech companies are still trading below their record 2018 highs. For example, Facebook trades around 22 times its trailing 12 month earnings, compared to 34 times at the start of 2018, per FactSet. Chinese internet giant Tencent Holdings Ltd. trades at 32 times trailing earnings, compared to 55 times earnings at the start of last year.
More Cautious Fed
Meanwhile, the Federal Reserve’s flip to a dovish stance has attracted back risk-oriented investors. The central bank has signaled a halt in further rate increases as it waits out for easing U.S. trade tensions and weighs a slowdown in the global economy, driven by factors like Brexit uncertainty and decelerating corporate earnings.
Tech Surprises with Stellar Profits
Meanwhile, big tech companies have reported strong, sometimes record, profits as S&P earnings overall have cooled. Facebook posted its best-ever quarterly report, while Alibaba grew its sales and profits by 41% and 37% respectively.
Recent Rally Has More Conviction, Less Crowded
Tech bulls also argue that the recent rally appears to have more conviction behind it compared to investors' past rush into the sector as a momentum play. Instead of being pulled into the sector due to “fear of missing out,” investors are now more spired by fundamentals like earnings growth.
“It feels more healthy than the go-go momentum we saw in 2017 and 2018,” said Dave Donabedian, chief investment officer at CIBC Private Wealth Management. “We’re in a global slow patch, so the earnings growth that growth stocks bring to the table looks more precious.”
The tech space also looks less "crowded" than the fourth quarter when too may big investors owned the shares, per WSJ. As a result, the sector is not as vulnerable to sharp reversals.
Positive drivers aside, not all market watchers are sold on tech. Firms including RBC Markets and Morgan Stanley have advised clients against going overweight on tech in 2019, citing headwinds such as regulatory risk, particularly in China, and the potential for weaker-than-expected growth. Nonetheless, it may be safe to say that as long as the techs continue to crush it on earnings, they are slated to outperform a slowing market.