The technology sector in the United States is one of the most resilient in the current crisis context. In a way, it is only normal, considering that with most people currently under lockdown, they have no alternative than using online services.Which in part has increased the demand for the platforms owned by the tech giants.
For instance Zoom, who offer video meeting software which has been much needed to communicate when remote-working. Have seen sales increase by 55x – a stunning metric by all means. Other companies like PayPal or Microsoft, while not trading as such multiples, still go above the sector’s median.
However for the investors, what choices exist besides the tech sector? The traditional industries have almost disappeared, in the sense that there is little or no activity left – airlines, leisure, automobile, etc. Therefore, investors with capital willing to move money into the future pile into the only sector that still makes sense during this crisis – the tech sector.
The Size of the Tech Rally
Here are some numbers to consider when putting into perspective the current tech rally. To start with, the Nasdaq 100 seven-week rate-of-change sits at its highest since the dot.com bubble. To continue, the sentiment within the sector as a whole is the highest seen in over a decade.
Historically, such situations like the two mentioned above, led to a pullback in the main equity indices. Or, at the least, to consolidation for the period ahead. If that is the case, the forecast for the tech sector is bleak.
However, there is a catch. When using historical data, investors assume conditions today are similar to conditions in the past. By all metrics – they are not, not only today but never.
For instance, comparing the stock market performance in the last three months with a similar pattern from five years ago makes no sense because the monetary policy conditions differ – the interest rate level, the stimulus, everything. It is all about the inputs (i.e., Fed’s monetary policy) and the outputs (stock market performance).
Another thing which the investors calling for a meltdown in the tech sector are missing is that in a new paradigm, previous metrics do not matter anymore. A paradigm shift happens either when new industries emerge out of nowhere, and investors embrace them wholeheartedly, or when established models gain traction by mass adoption.
So far, investors favor the second option, if only considering how far they are willing to push the tech sector.