The US tech stock bubble – what next?

The US stock market has been the place to be in recent years: while the UK’s FTSE All Share is up 91%, the S&P 500 has returned a huge 341% in the past decade, led in the main by the giant technology companies. As the US represents 54.5% of the global stock market, the MFP portfolios have all benefitted from this growth.

As more and more of our daily lives have moved online, the likes of Facebook, Amazon, Apple, Netflix, Google and Microsoft – or the FAANGMs as they are known – have grown exponentially. Today, this handful of firms represent just under a quarter of the S&P 500 and collectively are worth almost $9trn. It’s therefore perhaps unsurprising that they have a big effect on the US stock market returns. Indeed, data over the past eight years from Yardeni Research, Inc shows this quite starkly. 

Since the end of 2012, the S&P 500 ex-FAANGM has returned 140% in dollar terms while the FAANGMs themselves have returned 672.8%. But having done so well, the perception now is that the technology sector is super-expensive, and some have even questioned if we are in bubble territory. This, coupled with the reopening of world economies as Covid restrictions are lifted, has led to the suggestion that investors should look to other parts of the US stock market for better future returns. 

The argument to invest in small and medium-sized companies is compelling. The US economy is really leading the world out of the post pandemic recession into a period of above average growth. And the bottom end of the market, where you find the mid and small cap cyclicals, is really geared into this period of booming US economic activity. 

Usually, when consumers come out of a recession, they are worse off than they were when they went in. That’s not the case this time – consumers are better off. And so you’ve got a large number of people with significant savings and a willingness to spend them. And the companies that benefit from that won’t be the tech companies. It’ll be the retailers, it’ll be the restaurants, it’ll be the factories. 

But the tech sector still looks very attractive. We’re not in a 1999 tech bubble repeat – these firms are making huge amounts of money. Take Google (or more precisely its parent company, Alphabet) for example. It beat the average analyst estimates by an astounding 68% recently, while its net income was up over 160% year-on-year. But it is still trading on a valuation which is almost in line with the market. 

To commentators, this tells investors that despite getting a boost from the pandemic in some areas, these tech beasts were also affected by lockdown and they too are now recovering. Remember – Apple had to close all its retail stores and Google gets a huge amount of its revenue from travel-related searches. The structural growth for these companies was so strong that we didn’t notice the recovery potential until the recent upswing in earnings. And most believe there is still plenty of room for further growth.