Wildly popular tech stocks are a two-edged sword, and some on Wall Street are offering dire predictions that the huge revenue being generated by firms like Amazon.com, Netflix, Facebook and others may soon lead to an inevitable reversal.
“It’s a big momentum trade, investors don’t care if they’re paying 15 or 20 or even 50 times earnings,” Mike O’Rourke, Chief Market Strategist at JonesTrading, told Vosizneias.com this week. “The problem is, once those names start giving up those gains, then the market starts to have problems.”
“If you ask anyone right now, if it’s a business owner they’ll say they’re afraid of Amazon. If they’re an investor, they’ll tell you Amazon is going up forever,” Andrew Bodner, president of Double Diamond Investment Group in Parsippany, New Jersey, also told the news organization. “Overall, it creates more volatility for the market because everyone owns Amazon, and if Amazon goes down you’ll see that reflected.”
Case in point: Amazon is currently trading at 167 times expected earnings, up from around 100 a year ago, according to Thomson Reuters Datastream. The S&P 500, on the other hand, is currently trading at approximately 17 times expected earnings.
The Financial Times suggested in mid-January that the tax cuts pushed and ultimately passed by the Trump Administration “will pose a challenge to the tech sector’s market dominance this year if the US economy finds a higher gear and polishes the profits and revenues of those sectors most sensitive to faster growth. Given the tech sector also pays a lower effective tax rate than others, it has less to gain from the reduction in the corporate tax from 35 per cent to 21 per cent.”
Only weeks ago, MarketWatch noted that while favoring large-cap technology stocks “proved a winning strategy during the recent bout of volatility that sent the stock market into correction,” the “risk of a crowded trade, one that could be ripe for reversal, in tech remains,” citing analysts at RBC Capital Markets.
Part of the reversal some see coming has to do with privacy concerns. “The revelation that Cambridge Analytica exploited the data of 50 million Facebook profiles to target American voters is indeed frightening,” The Guardian reported, adding, “But Cambridge Analytica shouldn’t act as a diversion from the real bad guy in this story: Facebook. It is mystifying that as his company regulates the flow of information to billions of human beings, encouraging certain purchasing habits and opinions, and monitoring people’s interactions, Mark Zuckerberg is invited to give lectures at Harvard without being treated with due skepticism. We have now reached the point where an unaccountable private corporation is holding detailed data on over a quarter of the world’s population. Zuckerberg and his company have been avoiding responsibility for some time. Governments everywhere need to get serious in how they deal with Facebook.”
Despite this and other concerns, however, momentum is a tough thing for investors to tear themselves away from, and many won’t. “People are going with what works, and if tech was working before the shakeout in February, then they’re going to stay in it,” Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey, told Vosizneias.
By Kenneth H.M. Robeson