There are good reasons to think that a lot of currently high-flying tech stocks will eventually see a healthy correction. But given both the current investor mood and the Fed's actions, we might need to see a news catalyst or two emerge before such a correction arrives.
When markets correct following a period of investor euphoria that has featured (along with heavy institutional buying) strong retail investor participation, it usually isn't just because valuations got high. Rather, as was the case in the fall of 2000, the good times end because news starts arriving that leads investors to question their upbeat growth assumptions for favored companies.
On the flip side, as long as news flow remains mostly positive for the companies that institutional and retail investors alike have fallen in love with, the party can go on in spite of stretched valuations for many favored companies. And along the way, many peers that aren't doing quite as well can also move higher -- especially at a time when the Fed has injected massive amounts of liquidity into financial markets and cut interest rates nearly to zero.
Over the last few weeks, news flow has mostly been favorable for the internet, software, chip and hardware companies seen as "winners" in the current macro environment, even if some less favorable news and commentary could also be found. The likes of online retailers, streaming service providers, game developers and collaboration software firms still generally have good news to share, as do companies supplying chips or components going into notebooks, telecom equipment and/or cloud servers.
One only has to look at the earnings reports delivered since Monday afternoon by app/infrastructure monitoring software firm Datadog (DDOG) , peripherals giant Logitech (LOGI) and analog chip, component and materials supplier II-VI (IIVI) for evidence.
Datadog beat estimates and issued above-consensus guidance, while noting weaker demand from verticals such as travel and hospitality has been offset by "substantially increased usage" from verticals such as streaming, gaming and collaboration. Logitech beat estimates while reporting strong double-digit webcam, videoconferencing hardware and tablet accessory sales growth. And II-VI trounced estimates and issued strong guidance while reporting heavy demand for products going into 5G networks and cloud data centers.
Nonetheless, for a few different reasons, it's possible that many of the "winners" will see growth cool in the coming months.
As many firms have cautioned, sustained macro pressures could eventually take a greater toll on consumer and business tech spending in a number of fields. Also, the easing of lockdowns will probably lead some of the consumer spending and leisure time that has shifted towards areas such as e-commerce, gaming, streaming and tech/electronics hardware to shift back into areas such as dining and travel, even if the latter fields are still relatively depressed. And any demand boost for products that's currently being fueled by stimulus payments is likely to eventually cool.
But in an environment such as this one, markets might need to see hard evidence of such top-line pressures emerging before their enthusiasm for favored and richly-valued tech companies significantly wanes.
