If it isn’t already obvious just how the pandemic has fundamentally upended the status quo, just take a look at where investors are parking their money: Suddenly, tech stocks are a safety play.
Stocks that used to be resilient purchases — consumer staples like Coca-Cola — have struggled as Covid-19 shutdowns have devastated the economy.
“Traditional stocks haven’t performed as well as the Nasdaq has,” said JJ Kinahan, chief strategist at TD Ameritrade.
The tech-heavy Nasdaq hit a record Monday, and the index is up 19% for the year. All three major US indexes have rebounded from March lows and are flirting with record highs again, but the S&P 500 is still more than 3% below its peak, which it reached in February. The Dow has even further to go — it’s 9% below its record.
Traditional safe-haven stocks have been rocked by a dramatic drop in consumer spending during the pandemic. Even as the economy is recovering, consumer staples aren’t selling in all the channels they used to, as live events and sports remain suspended.
Even as many sectors have bounced back, the crisis has changed how investors are thinking about where to park their money for a rainy day.
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“I want to go somewhere where a stock can still do well during a shutdown, and that’s technology,” said Kinahan.
Tech companies, in particular mature businesses like Microsoft, Apple or Google’s parent company, Alphabet [so-called FAANG stocks, along with Facebook, Amazon and Netflix], might look more stable during a shock like the pandemic lockdown. Tech businesses have also been able to adapt to the new pandemic normal more quickly, and certain products, like cloud services, did well during the lockdown and won’t go away in a recovery, Kinahan said.
Investing in Big Tech has been popular for a while now. That has worried some investors that the valuations of the S&P 500’s biggest names have soared to unsustainable highs. But they needn’t worry, said Credit Suisse chief US equity strategist Jonathan Golub.
The current top five of the S&P — Apple, Microsoft, Amazon, Google and Facebook — capture a big percentage of earnings and deliver faster growth, while their valuations are also lower than those of other S&P stocks, Golub said.
Earnings disaster
The stock market has rebounded from the dramatic Covid-19 selloff in March just in time for what will probably be one of the worst earnings seasons ever.
Companies are reporting on their second-quarter performance, which included the full pandemic lockdown and gradual reopening of the economy.
Earnings reports will underscore that some sectors, including tech, communications and health care, are more resilient in the face of this unprecedented recession, according to Capital Economics chief market economist John Higgins.
Although tech is flourishing, other sectors might need a bigger economic tailwind to grow.
“Stronger economic growth is required for some real assets sectors, such as infrastructure and energy, to achieve more sustainable long-term gains,” said US Bank Wealth Management chief equity strategist Terry Sandven.
The energy sector has recovered some since oil prices dropped into negative territory in April, but the industry needs economic growth to spur demand for its commodities.
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This earnings season, a CEO with a plan is more important than ever, Kinahan told CNN. It’s been a difficult time for everyone, but now it’s about how to step into the future.
“Most importantly, they should say how they will cut spending. That’s what the Street wants to hear, how they will bring down costs,” Kinahan said.
Cost-cutting might come in many different ways, including eliminating projects or jobs.
While Corporate America is trying to find its way out of the crisis, the country’s labor market remains in trouble. The unemployment rate has come down from its peak in April, but is still higher than it was at any point during the 2007-09 financial crisis.
