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Investment strategy
October 17, 2021

This is not your parent’s tech boom

October 17, 2021
David Bailin
Chief Investment Officer and Global Head of Investments
Steven Wieting
Chief Investment Strategist & Chief Economist
SUMMARY

Interest rates are fundamental to how all assets are valued. We see the US equity market, and technology sector, trading more rationally today than it was the late 1990s when markets ignored interest rates with ever higher growth expectations.

  • The valuation of US growth shares overall implies low future returns - not as low as the decade following the year-2000 tech collapse - but likely in the low-to-mid single digits over the coming full decade. Unlike the late 1990s, when fixed income yields were 7%, bonds offer little value or competition at sub 2% yields now.
  • It is certainly possible that high valuations will become higher first, driven by the early-cycle EPS outlook. Truly higher earnings can absorb the valuation hit from higher interest rates. Remember that only when tech revenues and profits peaked in 2000 did share prices collapse. There is no evidence to suggest the 18-month economic recovery will either falter or become less reliant on tech.
  • US value shares and most other global equities trade at far-lower relative valuations than during the tech bubble period, roughly 16X expected EPS, or close to their long-term average. While it is unclear how long the preference for US growth shares (at 29X expected EPS) will persist, the overall return picture for global equities is a substantially stronger one than at the 2000 market peak.
  • The outlook for the next year could be rewarding for cyclical tech industries such as semiconductors. The longer-term outlook for cybersecurity seems highly robust. Emerging health science, energy technologies, logistics and e-commerce also deserve investment allocations, though not without broader diversification across the global economy.
  • Fortunately for investors, portfolio diversification can be achieved at a reasonable valuation today, unlike 1999. Most broad-based, “patient capital” portfolios did in fact hold many tech shares over the long term and benefited from doing so. We don’t believe another fundamental tech recession will be avoided forever. But this does not ague for shunning the sector in our present recovery.
CIO Strategy Bulletin (PDF 694.88 KB)

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