The market is known to be seductive and skillfully lures its participants until they are as addicted as the striped bass, which cannot resist the shimmering flies we throw at them in Buzzards Bay.
Poor fish. Bad buyers of Bitcoin for $ 61,000, Snowflake for $ 380, and Teladoc for $ 290. But just because we fall in love with the darlings and avoid the hated does not necessarily mean a decimation.
Those basses are thrown back instantly (about 99% of them anyway) and the dregs of a market can and should often rise again. Take, for example, the performance of the tech sector, which fell out of favor in late 2020.
As the table shows, last year’s strongest sector, technology, was the weakest this year as the halo effect for digitally dominant global players wore off during the pandemic and vaccines offered a path to redemption for the losers of 2020.
The stocks of reopening groups such as airlines, hotels, energy, financial and industrial companies started rising sharply in late 2020 as these industries expected post-pandemic earnings to outpaced tech companies’ earnings growth.
If stock prices are anticipating changes in earnings, the above data supports the technology’s underperformance over the past six months. The earnings performance of industries knocked out by Covid such as energy, finance and industrial, driven by a huge wave of pent-up demand, appears to be outperforming that of technology. In summary, this is the argument the bulls of cyclical and value stocks have made for the past six to nine months. You have supported the right groups as the price changes above show.
However, assuming broad assumptions from a collective data set can lead to misleading conclusions. To say that baseball is boring just because pitchers take too long to deliver each ball is too oversimplification (although a definite contribution to it).
Similarly, the S&P tech sector is dominated by Apple and Microsoft, who make up 41% of its market weight, both of which have underperformed this year, and doesn’t include some of the most visible and dominant digital growth companies. Alphabet, Facebook, Amazon, and Netflix are all members of the FAANG cohort, but only two are under the Technology rubric.
After growing rapidly in 2021, Apple and Microsoft should see more moderate profit increases in 2022. As the table below shows, most of these large-cap growth stocks are expected to show earnings per share growth for the next year ahead of the S&P, although many of them have underperformed the S&P this year.
We wrote about how the multiples of many large-cap growth stocks have fallen with earnings estimates rising, which has made them more attractive in recent months. The table below shows the recent move towards the Nasdaq and growth stocks.
If we compare the top ten performers among the 30 largest S&P 500 stocks year-to-date and last month, we have seen a sharp shift recently from stocks like Chevron, Exxon and JPMorgan to growth / technology. The only names that appear on both lists are Alphabet, Nvidia, Paypal, and Facebook.
The market appears to be focused on large cap tech and digital names after moving away from them for over half a year.
Now that cyclical and reopening stocks have paid off amply, investors may now be looking to 2022 and aiming for higher long-term sustainable growth rates with comparable price-earnings ratios. Another positive thing for growth stocks is the fact that the 10-year treasury rate has fallen back to 1.5% from its march towards 2%.
While it would be naive to suggest that this trend should continue for the remainder of 2022, markets often return to forward-looking earnings growth when switching between industries.
Now let’s find an antidote to four-hour baseball games that can also shift the momentum back into this sector of the sports universe.
Karen Firestone is chairman, CEO and co-founder of Aureus Asset Management, an investment firm dedicated to contemporary wealth management for families, individuals and institutions.