Tech stocks are stuck in unfamiliar territory as laggards in the market

Photographer: Jason Alden / Bloomberg

Investors’ love for technology stocks has cooled noticeably this year.

And while the group’s upcoming torrent of income may provide an opportunity to revive the romance, tech faces an uphill battle to master the kind of dedication it once enjoyed in the stock market.

After overwhelming all other sectors in 2020, technology stocks in the S&P 500 Index have drifted towards the back of the pack this year, outperforming sectors such as financial services and manufacturing that are expected to have better growth prospects. Bulls bet that strong results and forecasts from companies like Apple Inc. technology back to the fore will help, but high valuations pose a challenge.

Tech stocks are lagging behind financial services, energy sector

Source: Bloomberg data

“If these companies are to return to share price growth, they need to have a good story about where and when the growth will come,” said Kim Forrest, Chief Investment Officer at Bokeh Capital Partners.

A rally in the past two weeks has brought the tech-heavy Nasdaq 100 Index back to a record high this month, after rising interest rates and concerns that stocks were overpriced sent the benchmark down 11% in early March. While tech once again leads the market for April, a 9.9% lead for the group in the S&P 500 this year still lags behind seven of the 11 other major industries.

As usual, the tech group is expected to show strong growth in sales and profits. What’s different this time around is that growth will be even better in much of the rest of the market this year, flattered by comparisons to the same period in 2020, when broad swathes of the economy shut down.

According to data from Bloomberg Intelligence, technology companies are expected to lead the S&P 500 with sales growth of 16% in the first quarter.

Projections for the rest of the year are not that clear, however. Fourth quarter growth is expected to be only 5.6%. In terms of earnings growth, technology looks even less attractive with 2021 estimates of 22% – an impressive feat, of course, but one that would lag financials, industrials, consumer discretionary and commodities.

For the bears, even beating those growth forecasts isn’t enough to support the highest valuations in years. With earnings lagging 41 times, the Nasdaq 100 is trading at its most expensive valuation since 2004.

Flashback to 2004

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

Source: Bloomberg

According to Daniel Ives, an analyst at Wedbush Securities, investors concerned about valuations underestimate the revenue growth potential 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 foundational growth stories taking place as part of the digital transformation,” said Ives. “Across the board, it will be a domination quarters for the technical room.”

Behind the S&P

Amazon.com Inc. is the only top five company expected to see its revenue growth contract this year, according to data collected by Bloomberg. This is hardly surprising, given the massive increase in core businesses, such as e-commerce and web services, in 2020 as a result of US lockdowns.

Big Tech Growth Outlook

Amazon is the only one of the top five US tech companies to see sales growth contract in the current fiscal year

Source: Bloomberg