Big tech stumbled into 2021. Don’t let that distract you from their long-term growth prospects

Detail of a man’s hand scrolling through Netflix on an Apple iPad Pro, taken on March 6, 2020.

Phil Barker | Future Publishing | Getty Images

Although Roaring Kitty and Gronk — two names that make me smile every time I say or write them — may create enough frenzied bidding among crowds of novices, speculators and spectators, there are other compelling issues for investors to focus on besides GameStop, AMC and non-fungible tokens or NFTs.

These include tensions playing out between two competing cohorts of investors.

On the winning side, since last September, are adherents of value, cyclical, and reopening stocks that have been rallying hard.

On the losing side are investors who have owned the large cap growth stocks, such as Apple, Amazon, Facebook, and Netflix, that carried the market through most of 2020. These digital giants have been underperforming cruise lines, hotels, banks, industrials, and energy stocks for months. 

Both sides agree on one thing: Gross domestic product growth will be combustible in 2021, thanks to two critical factors. The first is widespread vaccination, and the second is the enormous $1.9 trillion stimulus package that President Joe Biden just signed.

These allow for the resumption of huge swatches of the economy and the money to pay for those activities, products, and services. Estimates range from 5% to 7% economic growth this year, the type of numbers that make economists salivate. Party on!    

Near term versus long term

Sector Performance Table

Sector 9/31/20-3/11/21 12/31/20-3/11/21 Next 12 months P/E
S&P 50018.00%5.20%21.3
Communications Services24.20%9.10%22.3

Surprisingly, as the last column suggests, the earnings multiples for most S&P sectors, excluding Financials, are very similar.

That holds true for digital growth stalwarts — including Microsoft, Facebook and Google — that sell at about the same ratio of price-to-forward-earnings as Caterpillar, Deere and Emerson Electric, despite having stronger long-term growth expectations. 

Where will we see growth?

Years of GDP Recovery and Strong Economic Growth

Dates Change in GDP S&P 500 Return Nasdaq Composite Return Recession Prior Year

In every case, except 2000, the year in which the dot-com bubble burst, the S&P 500 experienced positive returns.

Across all years, the Nasdaq Composite both outperformed and underperformed the S&P five times and was in line with the broader index once. By far, the worst year was 2000, when the composite dropped 39%. The best year was 1999, when it soared 85.6%.   

The case has been made that 2021 is comparable to 2000, but the similarities relate primarily to the extreme euphoria surrounding the most expensive stocks.

These Robin Hood market darlings, many in software and biotech, sell for 10 to 50 times revenues. They traded straight up from early in the pandemic.

These names include CRISPR, Tesla, Peloton, Snowflake, and Palantir, plus newer IPOs, such as Airbnb and DoorDash. Many have already hit air pockets, some very steep, but could still have room to decline before finding solid ground. 

That doesn’t mean that the more reasonably priced stocks within the Technology and Communications Services sectors, including the largest weights in the S&P 500, cannot begin to show some renewed vigor. 

I don’t think we need to query Roaring Kitty or Gronk on the subject, but since everyone is asking them to weigh in on investments, sure, why not? 

Karen Firestone is chairman, CEO, and co-founder of Aureus Asset Management, an investment firm dedicated to providing contemporary asset management to families, individuals and institutions.

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