Technology stocks have seen unprecedented gains in recent months, leading some to speculate that a bubble like that seen in the late 1990s might be inflating.
That's not the case, however, and tech's recent rally is set to continue, according to analysts at JPMorgan.
In a note Monday, analysts at JPMorgan Cazenove — an arm of the bank in Europe, the Middle East, and Africa — said both software and hardware stocks have significantly outperformed most other industries during the COVID crisis.
“There is widespread concern that the impressive performance of the sector … on top of 20% relative run last
year, is making Tech vulnerable to profit taking. Indeed, many pundits keep arguing that there should be a style shift, out of Growth and into Value, basically out of Tech and into Financials and Energy,” a team of analysts said Monday.
The analysts, however, say they are “skeptical” of such forecasts, saying that tech's performance this year isn't anything like what happened in the late 90s.
“In contrast to the dot-com bubble, the current rally has been supported by strong earnings delivery,” the team wrote.
It also noted that the price-to-earnings ratios of major tech companies is not “stretched.”
The price-to-earnings ratio shows a company's stock earnings per share (EPS) to the current market price. A higher P/E ratio signals greater buyer interest and an expectation that the company's stock will grow further.
The bank noted that tech, staples and pharma were the only three sectors positive earnings growth in the second quarter of 2020, while overall US EPS growth was down 33% year-on-year.
“Tech has healthy balance sheets and strong cash flow generation, again in contrast to the 2000 episode,” JPMorgan said, noting that it maintains an “overweight” rating on tech. That rating means it effectively recommends that clients buy tech stocks.
“Short term, Tech has been relatively less hurt by the current COVID-19 crisis, in particular when compared to consumer sectors. Parts of the Tech space have, in fact, taken greater market share during the current virus
dislocation,” JPMorgan said.
“While US Tech price relative is close to highs seen in early 2000, it is not as stretched in terms of the share of total market cap,” JPMorgan said.
Technology stocks have soared in value during the pandemic, helping pull the S&P 500 and Nasdaq to record-highs in recent weeks.
Markets have rebounded sharply since a meltdown in March when coronavirus was first spreading quickly in the Western world. The S&P 500 has soared more than 50% since touching a low in March.
The tech-heavy Nasdaq Composite has also risen 67% since closing at a low of 6,994 in March.
Apple became the first US-listed company to reach the $2 trillion mark last week. Its stock price has risen 70% since the start of the year.
Tesla has been another stock market favorite, having closed above $2,000 for the first time ever last week. Its stock is up over 390% since the start of the year.
Participants have attributed the explosive stock market recovery to unprecedented central bank stimulus packages and hopes for the rapid development of a vaccine for COVID-19.