Commentary on Political Economy

Wednesday 9 September 2020



Tech Investors Should Worry About the End of Lockdown

Big Tech received a triple boost when the global economy went into lockdown. That could turn into a major drag.


Another day, another plunge in technology stocks. Is this the end of their incredible run? If not, what could trigger the end?

Things that can break stocks generally divide into three, and each holds dangers for Big Tech and similar growth stocks: a switch in sentiment, a change in the economic outlook and a hit to fundamentals.

The switch in sentiment has been under way for a week now, and hit the best-performing tech stocks (and similar disrupters) hard. At its low on Friday, Apple, the largest company by value, was down just shy of 20% from the previous week’s high. Electric-car maker Tesla has lost almost a third of its value from last week’s high, the general tech downdraft worsened by its plan to raise $5 billion from shareholders and failure to join the S&P 500.

There were plenty of warning signs that the market was getting excessive, especially in options, as the last Streetwise column discussed. One example: Tesla was up 74% in August alone.


It shouldn’t be a surprise that after such an explosive rise, the most popular stocks should fall back to earth. So far, at least, the fall has merely taken the froth off; the Nasdaq-100, S&P tech sector and Russell 1000 growth indexes are roughly back to where they were a month ago.

Upward momentum in markets can turn into downward momentum, and Big Tech could fall truly out of favor. But sentiment on its own is unlikely to do more than correct part of the rapid gains.

The economic outlook is a bigger danger, as it has an increasingly strange link to tech stocks. They thrived in lockdown from a triple boost: We all moved our lives online, the collapse of the economy meant their growth had rarity value, and lower Treasury yields mechanically pushed up the valuation of stocks with a decent profit outlook.

When bad news on the economy makes a stock outperform, good news probably means it will underperform. So far we haven’t had much good news, but if we do we should expect the three boosts to turn into a major drag for Big Tech. The work-from-home  impulse will fade, even if fewer of us go into the office than before. Old industries will offer great—if temporary—growth in a recovery. And stronger economic growth means higher Treasury yields (even with the Federal Reserve’s dovishness), which typically hits the highest-valued stocks hardest.

Even the fundamentals of the big tech stocks aren’t as great as they were. The China trade war has morphed into a technology war, which leaves many of the leaders (especially Apple and the chip makers) exposed. Antitrust regulators have finally waked from their slumber, while tax authorities in Europe are trying their hardest to grab some of the profits of the tech multinationals. The software company behind popular game Fortnite has opened up another front, using the courts to try to break Apple’s control of apps.

The tech disrupters are also increasingly competing with each other. So far this hasn’t done significant damage to earnings, because the markets for video and music streaming, cloud services and online advertising have been expanding so quickly. But one day they will either compete away each other’s fat profit margins, or we will enter a technology dystopia with strictly defined monopolies. The first is good for customers but hurts shareholders, while the second is terrible for society—and while every investor wants to buy a business protected by what Warren Buffett memorably called a “moat,” history is full of monopolies that grew fat and lazy.

Finally, the old industries might eventually get their act together. The video-streaming wars are part of a fightback by Disney and the cable companies against Netflix and Amazon, and while it isn’t obvious that Netflix has lost ground, it is at least a risk. The car giants are finally pushing back against Tesla with decent electric models, too, with General Motors on Tuesday inking a deal with newcomer Nikola. Traditional publishers have been lobbying governments to force Alphabet’s Google to pay for news, with some success in Australia and parts of Europe.

The economic and fundamental threats are for the future, though. The immediate risk is that sentiment gets a lot worse. I suspect we’re almost done with blowing froth off the tech stocks, even though valuations remain very high. But I am hopeful that the economy will keep improving, making the longer-run outlook better for the rest of the market than for Apple and its peers.

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