Technical stocks are trapped in the unknown area as market guards

Photographer: Jason Alden / Bloomberg

Investors’ love affair with technology stocks has cooled noticeably this year.

And while the coming avalanche of earnings from the group may provide an opportunity to rekindle the romance, technology is embroiled in an uphill battle to command the type of commitment it once had in the stock market.

After all other sectors came under scrutiny in 2020, technology stocks in the S&P 500 index have drifted to the back of the range this year, outperforming sectors such as the financial and industrial sectors that have better growth prospects. Bulls bet that strong results and predictions from companies like Apple Inc. catapult technology in the foreground will help, but high valuations are a challenge.

Technical stocks behind finance, energy sector

Source: Bloomberg data

“If these companies want to return to stock price growth, they need to have a good story about where the growth is going to come from and when,” said Kim Forrest, chief investment officer at Bokeh Capital Partners.

Over the past two weeks, the tech-heavy Nasdaq 100 index has again hit a record high over the past month after interest rates rose and shares became too expensive, the benchmark fell by 11% in early March. While technology leads the market again for April, there is a 9.9% advance for the group in the S&P 500 this year, seven of the 11 other major industries.

As is usually the case, the technology group is expected to grow strongly in sales and earnings. What is different this time is that growth in much of the rest of the market this year will be even better, complemented by comparisons to the same period in 2020 when the broad sections of the economy were closed.

Technology companies are expected to grow the S&P 500 by 16% in the first quarter, according to data compiled by Bloomberg Intelligence.

However, forecasts for the rest of the year are not quite so clear. Growth is expected to be just 5.6% in the fourth quarter. In terms of profit expansion, technology looks even less attractive with estimates for 2221 at 22% – an impressive achievement, admittedly, but one that lags behind with financial, industrial, consumer discretionary and materials.

For the cattle, it is not even enough to beat the growth projections to support valuations that are highest in years. The Nasdaq 100 is trading at 41 times the profit at the most expensive valuation since 2004.

Flashback to 2004

The Nasdaq 100 P / E ratio is the highest in almost two decades

Source: Bloomberg

Daniel Ives, an analyst at Wedbush Securities, believes investors who are alarmed by valuations underestimate the potential for revenue growth for many technology companies such as Microsoft Corp. and cybersecurity company Zscaler Inc. Inc.

“What has been lost in the noise is the huge underlying fundamental growth stories that are taking place as part of the digital transformation,” Ives said. “Overall, it’s going to be a dominance quarter for the tech space.”

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According to data compiled by Bloomberg, Amazon.com Inc. the only one of the top five that is expected to shrink its revenue growth this year. It’s hardly a surprise considering how many core businesses like e-commerce and web services have grown in 2020 due to US closures.

Growth prospects for major techniques

Among the five largest U.S. technology companies, Amazon is the only one expected to shrink revenue in the current fiscal year

Source: Bloomberg