Tech stocks have had a spectacular run, and you might be tempted to sell them to avoid the inevitable declines.
If you’re a long-term stock investor, stick with them. Some of the biggest names in the market, ranging from
(symbol: MSFT) to
(NVDA) are still reasonably valued once you factor in how quickly they are growing their profits.
“I think there is potential for mean reversion,” said Keith Lerner, co-head of investment strategy at Truist. “But we still favor Big Tech.”
The Nasdaq 100 Index, made up of just over 100 of the largest non-financial companies in the Nasdaq Composite, is up about 34% from its late-December bear market low. By comparison, the
the stock market index has risen 9% since the start of the year, while
Vanguard S&P 500 Value Index Fund ETF
(VOOV) grew only 4%
Nvidia and Microsoft are up more than double and around 55%, respectively, from their late-2022 lows.
(META) the stock nearly doubled from its low in the second half of 2022, while and
(GOOGL) is up about 50%. These companies are embedding artificial intelligence in their products, expanding their markets for their services, while falling bond yields have pushed up their valuations.
The Nasdaq 100 is now worth about eight times the value of the Russell 2000, compared to just under six times a few months ago. The last time the Nasdaq 100 overtook the Russell 2000 to a similar degree was in 2020, when ultra-low interest rates boosted growth stock valuations, while Covid-related restrictions kept people indoors and on screens, increasing income from streaming, social media and work. -domestic necessities such as the cloud.
It didn’t end well for technology. Rising inflation pushed rates higher, while people started spending time outside the home as the pandemic subsided, leading to lower tech revenues. The Russell 2000 then beat the Nasdaq 100 for most of 2021 and 2022.
This time might be different. Granted, the performance of tech stocks is likely to moderate and investors may find better opportunities in certain areas of the market, but the long-term trends that are fueling tech are still in place.
Analysts from Nvidia, Microsoft, Meta Platforms and Alphabet expect double-digit growth in earnings per share for several years, according to FactSet. Meanwhile, valuations, while elevated, are not out of control.
Alphabet and Meta are trading at just over 20 times expected EPS for next year, less than twice their expected annual EPS growth rates for the next few years. While Nvidia and Microsoft trade at 48x and 30x earnings, respectively, that’s still less than twice expected EPS growth. These are not outlandish valuations, given that the S&P 500 is hitting 18 times earnings and forecasting EPS growth of just 8% for the next two years.
The race for tech stocks will not be smooth, it never is. Technical analysts say there could be a shortage of buyers because portfolio managers have stocked up on tech stocks and no longer want to take risks at higher prices. Indeed, tech stocks have finally stabilized over the past few trading days.
But unless you believe developments like artificial intelligence aren’t here to stay, tech stocks will resume their upward march. Stay the course.
Write to Jacob Sonenshine at firstname.lastname@example.org