After hitting the March floor, US stock prices rebounded and then rose to new all-time highs. The growth was led by large technology companies, which, by the nature of their business, benefited from measures to combat the coronavirus pandemic. The Nasdaq 100 technology index thus strengthened significantly, relative to the US benchmark index S&P 500. The fundamental valuation of the price-to-earnings ratio has even surpassed the level at the turn of the millennium when optimism about the use of the Internet shot the technology sector to the skies.
Facebook, Apple, Amazon, Microsoft and Google have managed to maintain high revenue growth in an otherwise low coronavirus-driven growth environment. As a result, the S&P 500 index began to develop mainly based on these five mentioned companies, which currently represent less than a quarter of the total market capitalization of the index.
At the last press conference, Jerome Powell foreshadowed zero interest rates at least until 2023. The committee also cut its GDP forecast for 2021 to 4% from 5%, while lowering its unemployment rate forecasts to 5.5% from 6.5%. Powell said most FOMCs would have to conclude that the monetary position promotes financial instability. However, the market did not like it and the shares headed down.
This year’s difference between the best and worst-performing sectors in the S&P 500 index is unusually large. According to data collected by Bloomberg, technology stocks were up 27% higher, while the energy sector lost 47%. As a result, the gap between these sectors was 74%, the highest in the sectors since 2000. Many investors warn of the similarity of current developments to those that preceded the bursting of the technology bubble in 2000. The Nasdaq wrote off more than 80%.
“The year 2000 looks in the rear-view mirror a bit like a costume rehearsal for a performance that took place in the year 2000,” writes Benroniso in Barron’s magazine. Evisohn came across the current overvaluation of the 5 biggest technology titles compared to the market, the difference higher than before 2000. A new report by Bernstein’s Toni Sacconaghi also focused on the Nasdaq technology index and concluded: “a little bit”.
On the positive side, although many call the current situation in the technology market a bubble, their business model and economic performance say otherwise. In recent years, the business of technology companies has flourished and thanks to their managers and the growing demand for their services, we can expect this development in the future.