Tech Outlook Series (Part 1)：Can US Tech Stocks Continue to Rise？
With Apple's market value surpassing $3 trillion last Friday, US tech stocks have reached a new milestone. Against the backdrop of the soaring tech stock prices, what we are more interested in knowing is whether US tech stocks can continue to rise?
Since the beginning of 2023, the Nasdaq 100 Index, which is primarily composed of major tech giants such as Microsoft, Apple, Nvidia, Amazon, Tesla, Meta, and Google, has significantly outperformed both the S&P 500 Index (4.05%) and the US small-cap Russell 2000 Index (13.71%), with a gain of 37.09%. The rise of US tech stocks can be attributed mainly to the gradual end of interest rate hikes and the catalyzing effect of the AI trend.
The current rise of technology stocks is mainly concentrated in the large-cap US tech giants. On the one hand, this is due to their excellent positioning in AI, and on the other hand, it's because market risk aversion has made large technology companies with high earnings certainty and large buybacks more favorable.
Looking at the composition of this round of gains, the increase in valuation has contributed much more than the increase in company EPS. According to the Q1 2023 financial reports of technology stocks, their revenue and net profit only slightly increased. However, with the rise of ChatGPT, the demand for generative AI has increased, driving tech companies to provide higher performance guidance for the future and raising the market's expectation for the growth potential of the AI market. In addition, the slowdown in US rate hikes has eased the valuation pressure on tech stocks, and the increase in valuation remains the main driving factor behind the rise of US tech stocks.
As US large-cap tech stocks continue to reach historic highs, the total market value of tech leaders has equaled or exceeded the highs of September 2020 and November 2021, far exceeding the levels during the 2000 dot-com bubble. So, is there currently a bubble in US tech stocks, and how will stock prices evolve in the future?
Compared with the dot-com bubble in 2000, this round of tech stock gains has better performance support. The main reasons for the burst of the dot-com bubble in 2000 were a further increase in US rate hikes, the saturation of internet penetration, unsustainable business models that burned through financing, capital outflows from emerging markets due to the Asia financial crisis, as well as financial fraud and anti-monopoly sentiment spreading, exacerbating market panic. From the current market situation, the environment in which US tech stocks operate is much more optimistic than during the dot-com bubble:
1) There is high certainty that US inflation data will fall, and the slowdown in US rate hikes is relatively clear and well-managed, so the negative impact of monetary policy on tech stocks is expected to gradually diminish;
2) Under the dual drivers of cost reduction and efficiency improvement and AI, US tech giants' profit growth rate has bottomed out and rebounded, and the earnings outlook for the tech sector in the next 12 months is relatively optimistic;
3) The US economy remains robust, and the balance sheets of enterprises and households are relatively healthy, making it difficult to trigger a deep recession.
Therefore, looking at the evolution of US tech stocks in the future, I believe that the current valuation of US tech stocks is high, and there may be a risk of a correction in the short term. Comparing with the dot-com bubble in 2000, it can be found that this round of tech stock gains has more fundamental support, and the macroeconomic environment, such as monetary policy and the US economy, is relatively optimistic. There is no need to worry too much about a repeat of the dot-com bubble burst.
In the future, whether the profitability of US tech stocks can continue depends mainly on two factors: 1) Whether monetary policy can continue to be accommodative as expected; 2) Whether AI can bring substantial performance growth to companies.
In an optimistic scenario, assuming that the Fed stops hiking interest rates and the Q2 2023 earnings reports released in July show that AI can bring actual performance growth to tech stocks, then the upward trend of tech stocks will continue.
In a neutral scenario, assuming that the Fed continues to hike interest rates 1-2 times (as expected), and AI has not yet translated into company performance, but expectations have not been shattered. In this case, tech stocks will show a volatile trend.
In a pessimistic scenario, assuming that the Fed hikes interest rates beyond expectations or that AI cannot bring substantial growth to companies, then tech stocks will face a valuation decline and a bubble burst in this situation.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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