Technical stocks are mired in territories unknown as market laggards

Photographer: Jason Alden / Bloomberg

Investors ’love affair with tech stocks has cooled markedly this year.

And while the group’s upcoming flood of profits may offer an opportunity to revive romance, technology is facing a tough battle to control the kind of devotion it enjoyed in the stock market.

After treading the rest of the sectors in 2020, the technological actions of the S&P 500 index have been drifting towards the back of the package this year, surpassed by sectors such as finance and industry that are perceived with better growth prospects. The bulls are betting on the strong results and forecasts of companies like Apple Inc. they will help the technological catapult to come to the forefront, even though high ratings pose a challenge.

“If these companies want to return to stock price growth, they need to have a good history of where growth will come from and when,” said Kim Forrest, investment director at Bokeh Capital Partners.

A rise in the last two weeks has returned to the Nasdaq 100 index, which has had a lot of technology, to a record this month after rising interest rates and concerns that stocks were too expensive, and went lower the benchmark index by 11% in early March. While technology is once again leading the market during April, a 9.9% advance for the S&P 500 group this year still follows seven of the other 11 major industries.

As is often the case, the technology group is expected to record strong sales and profit growth. What is different this time is that the growth of much of the rest of the market will be even better this year, flattered by comparisons with the same period in 2020, when large areas of the economy closed.

Technology companies are expected to lead the S&P 500 with 16% revenue growth in the first quarter, according to data collected by Bloomberg Intelligence.

However, the projections for the rest of the year are not so bright. Growth is expected to be 5.6% in the fourth quarter. In terms of profit expansion, the technology looks even less attractive with estimates for 2021 of 22%, of course, an impressive performance, but one that would lag behind financial, industrial, consumer and material discretionary resources.

For bears, even surpassing these growth projections is not enough to support the higher valuations of recent years. The Nasdaq 100, with 41 times behind profits, has been trading at the most expensive valuation since 2004.

Investors who care about valuations underestimate the revenue growth potential of many technology companies like Microsoft Corp. and cybersecurity company Zscaler Inc., which are about to capture even more spending from companies investing in digital services, according to Daniel Ives, an analyst at Wedbush Securities. Inc.

“What has been lost in the noise is the massive stories of fundamental growth that are happening as part of the digital transformation,” Ives said. “Overall, it will be a quarter of technology space dominance.”

Following the S&P

Amazon.com Inc. is the only company among the top five projected to see its revenue growth slow this year, according to data collected by Bloomberg. This is no surprise given the extent to which its core businesses such as e-commerce and web services increased in 2020 as a result of the U.S. blockades.