Technical actions are piled up in a territory unknown as market delays

Photographer: Jason Alden / Bloomberg

The love story of investors with technology stocks has cooled significantly this year.

And while the group’s upcoming earnings flood may provide an opportunity to rekindle the romantic story, technology is facing an upward struggle to control the kind of devotion it once enjoyed in the stock market.

After reviewing all other sectors in 2020, technology stocks in the S&P 500 index have moved to the back of the package this year, outpaced by sectors such as the financial and industrial sectors perceived as having better growth prospects. The bulls bet that the results and strong forecasts from companies like Apple Inc. will help catapult technology back to the forefront, but high ratings are a challenge.

Technology stocks remain behind finance, the energy sector

Source: Bloomberg data

“If these companies want to return to rising stock prices, they need to have a good story about where they will come from and when they will grow,” said Kim Forrest, chief investment officer at Bokeh Capital Partners.

A rally in the last two weeks has brought the highly technical Nasdaq 100 index back to a record this month, after raising interest rates and worrying that stocks were too expensive, it fell 11% in early March. While the technology is again the market leader in April, a 9.9% advance for the S&P 500 group this year targets seven more of the other 11 major industries.

As usual, the technology group is expected to see strong growth in sales and earnings. What is different this time is that the growth of most of the rest of the market will be even better this year, flattered by comparisons with the same period in 2020, when large areas of the economy were closed.

Technology companies are expected to lead the S&P 500 with 16% revenue growth in the first quarter, according to data compiled by Bloomberg Intelligence.

However, the projections for the rest of the year are not as bright. The increase is expected to be only 5.6% in the fourth quarter. In terms of profit expansion, the technology seems even less attractive with estimates for 2021 at 22% – an impressive performance, for sure, but one that would lag behind in terms of the financial, industrial, discretionary and material consumers.

For bears, even exceeding these growth projections is not enough to support the assessments that are the highest in recent years. 41 times higher than the profits, the Nasdaq 100 is trading at the most expensive valuation since 2004.

Flashback to 2004

The Nasdaq 100 P / E ratio is the highest in almost two decades

Source: Bloomberg

Investors who care about valuations underestimate the revenue growth potential for many technology companies like Microsoft Corp. and cybersecurity company Zscaler Inc. Inc.

“What is lost in the noise is the massive story of fundamental growth that is happening as part of the digital transformation,” Ives said. “In general, it will be a quarter of dominance for the technological space.”

Following S&P

Amazon.com Inc. is the only company in the top five projected to see its revenue decline this year, according to data compiled by Bloomberg. This is not a surprise, given how much its core businesses, such as e-commerce and web services, have grown in 2020 as a result of the US blockade.

Great prospects for technological growth

Among the top five technology companies in the US, Amazon is the only one projected to see revenue decline in the current fiscal year

Source: Bloomberg