Eq: Tech
(San Francisco)
One of the questions swirling in the back (or front!) of investors’ minds is whether big tech megacaps are overvalued. They have had a stellar run this year and are trading at rich multiples, which has led to fears of overvaluation. On the other hand, they still seem like they might be the best growth play in the market. At the end of September one could argue things had gotten out of hand. FAAMG stocks were trading at 35x earnings while the rest of the S&P 500 was at 12x, the widest gap since 2000. However, since then fortunes have reversed, with the spread now only 31x to 20x.
FINSUM: So the big question is whether the shrinking of the spread means there is margin for FAAMG growth, or it is a part of a larger trend towards valuation parity? We think it depends on the regulatory path that new administration takes.
(San Francisco)
The anti-trust probe into Google elicited little more than a shrug from markets. Investors seem to think this just Washington saber-rattling. However, what is not well understood is that the probe is not just a risk for Google, but a major one for Apple. Apple is intimately connected to the case the DOJ is trying to form. In particular, Google pays Apple billions of Dollars a year to be the default search engine on iPhone, a fact which the DOJ has centered its case on. That money flows into Apple’s services unit, which has been its biggest growth driver in recent years. According to an analyst from Bernstein “There’s a risk, if you play it out, that there actually could be more financial impact to Apple than there is for Google”.
FINSUM: The market seems to have fundamentally misunderstood the risk here. Google got the headlines, but Apple potentially has even bigger risk.
(San Francisco)
There are rising fears about the potential over-valuation of big tech megacaps. While they have risen very strongly this year, their P/E ratios are not the only worry. Regulations are also weighing on investors’ minds, especially after the announcement of the anti-trust probe by the DOJ into Google. That has not stopped the stocks from rallying, however. Most investors are betting that the government’s numerous overtures about anti-trust moves (which have come from both sides of the aisle) are merely saber-rattling.
FINSUM: As it concerns large cap value versus big tech stocks, the answer is simple—it seems like time to buy both. Big tech may keep rising, but there is enough fear to keep other large cap stocks rising as we enter a prolonged recovery, as they have been for several weeks.
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(Washington)
The market has been increasingly betting that Biden is going to win the election, but there is still a great deal of uncertainty. The outcomes seem like almost diametrically opposed routes for the country, and accordingly it feels like many asset classes could head in opposite directions depending on the outcome. With that in mind, Savvas Savouri of ToscaFund Asset Management, has published a very interesting and clear diagram explaining how each asset class will react to either a Trump or Biden win (see above). The most interesting thing about this is how similar the response will be across several asset classes. For example, no matter who wins, it appears likely that commodities, gold, US domestic staples, and exporters will gain, while in either scenario, Treasuries, REITs, and the Dollar will lose.
FINSUM: This is an excellent diagram that gives a concise view on how things may change following either a Biden or Trump victory. Two things jump out to us here. Firstly, that tech shares look likely to lose if there is a blue wave; and secondly, that the Dollar is headed down in either outcome, so exporters are likely to do well. It is easy to imagine that a blue wave would result in a broad rally of the S&P 500 that is not led by tech.
(San Francisco)
Apple has a big moment of truth waiting for it this autumn. The company has seen a recent drop in value after a very strong rise. Part of the reason is uncertainty about the company’s next big phase: 5G. Tomorrow, Apple will unveil its first ever 5G phones. At stake is whether this change will begin another upgrade super cycle, the likes of which have powered the company to the meteoric heights upon which it now sits. Whether or not a super cycle happens seems to come down to whether 5G really creates a transformative experience for phone users. There is a lot of hype around 5G’s superfast speeds and how they will change the nature of smartphones, but as yet little is tangible. One prominent analyst, Dan Ives, from Wedbush, is all-in on Apple, saying “I believe it translates into a once-in-a-decade-type upgrade opportunity for Apple”.
FINSUM: For the last several years (since at least 2015), Apple’s new models have felt a lot less groundbreaking. If this years’ can break the trend, there will be another big sustained jump in the stock.
(San Francisco)
The CME Group has published a piece about the outlook for FAAMG stocks in the context of the underlying economy. The CME notes that the FAAMG stocks now account for 22% of the total S&P 500, so their influence is skewing investors’ view of the underlying economy. The reality is that the S&P 500 minus those five stocks is a much more accurate—and much bleaker—representation of the economy. CME says that as the reality of a slow recovery starts to play out in the market’s consciousness, there is bound to be a correction in FAAMG stocks.
FINSUM: The law of gravity would seem to dictate that a fall in FAAMG is inevitable, but what is the catalyst for such a move? Their earnings are good as is growth momentum.