Though I'm among those who think that many tech stocks have risen too far, too fast from their March lows, there has admittedly been a decent amount of good news since then to justify a partial reflation of tech valuations.
Interest rates have been cut nearly to zero, and (in spite of a recent jump) the yield on 10-year Treasurys is still below 0.9%. That spells a lower discount rate when calculating the present value of a company's expected long-term cash flows.
The Fed and Congress have pulled out all the stops to prop up consumer spending and limit the number of businesses that are forced to shut down for good, and (so far at least) have managed to do it without causing inflation or Treasury yields to soar. By doing so, they've not only taken worst-case economic scenarios off the table, they've also instilled greater confidence in the power of aggressive monetary and fiscal stimulus to limit the damage done by future crises.
The COVID-19 pandemic has clearly provided a boost to many types of tech activities and spending -- from streaming services and e-commerce/online payments to collaboration app usage and cloud capital spending. And though some of this extra demand is probably a pull-forward of activity/spending growth that would have otherwise happened over the next couple of years, some of it is a positive for the long-term values of the companies benefiting from it.
And last but not least, the speed at which a lot of the consumer activity that plummeted thanks to COVID-19 lockdowns has rebounded following reopenings has been faster than many (myself included) expected. While we're still far removed from a return to normalcy, it's understandable that markets would be pleased at how many consumers are once more willing to do things such as dine out or make Airbnb reservations.
But while such positives can't be ignored, it's also hard to ignore the fact that some major negatives still exist. Among them:
- A lot of the tech companies that have rallied sharply are not only still seeing meaningful top-line pressures, but also cautioning that it's far from clear when these pressures will fully lift. This list not only includes firms badly affected by COVID-19's impact on consumer activity, such as Uber (UBER) and Expedia (EXPE) , but also the likes of online ad firms, software companies with strong SMB and travel/hospitality exposure, and chip companies with strong auto, industrial and/or smartphone exposure.
- High unemployment and a weak macro environment are likely to remain consumer spending headwinds for a while. And though it's possible that another stimulus bill will be passed, consumer spending could weaken once the boost provided by recent stimulus checks and extra unemployment insurance benefits (set to end in July) wears off.
- Though new U.S. cases and deaths have thankfully declined in recent weeks, COVID-19 is still very much out there. The situation has improved considerably in the NYC metro area, but many reopening Sun Belt states have seen cases go up lately, and recent mass protests might also cause additional case growth.
One also can't ignore how non-fundamental factors appear to be contributing to the market's rally. Specifically, the liquidity injected into financial markets by the Fed's money-printing/asset purchases, and a recent, 1999-like surge in retail trading activity and account openings. Recent parabolic moves in companies such as Nikola (NKLA) and Genius Brands (GNUS) are one tell-tale sign of how much of an effect the latter phenomenon is having on some high-beta tech names.
As Aldous Huxley once said, facts don't cease to exist because they're ignored. And eventually, some of the uncomfortable facts about the current macro and tech spending environment that markets seem to have ignored as they once more bid shares of many tech names to sky-high valuations are likely to make their presence felt.
