While it seems tech may be in a manic phase, we believe prices have further room to run.
Both low inflation and near-zero rates are a boon for tech. At less than 1%, inflation is so far below the Fed target, Chair Powell recently said "we are not even thinking about thinking about raising rates."
Low rates benefit tech valuations because tech stocks derive an outsize proportion of their value from long-term deferred earnings. Like bonds, distant profits are especially sensitive to fluctuations in the discount rate.
Also, in the Covid-era, companies, governments and individuals are spending more on hardware and software.Whether WFH arrangements are here to stay is not entirely clear. But it is looking more like WFH has advantages that could give the trend a boost beyond the pandemic.
So far, most investors have sat out the tech rally as cash holdings - both for investors and households - have surged since the lock-down. When mom and pop (and pipsqueek) start to pile in, that's when things get heady. That's just what happened when the Nasdaq P/E heated up to 200 during the tech bubble (1995-2001). For comparison, today it's a cool 23.
That said, it's not a ride for the faint of heart and keep your allocations moderate. In the second half of the 1990s despite the overall rise in tech prices, there were 10 occasions when the Nasdaq experienced a more than 10% correction and the index tumbled more than -20% in 1998 before bounding to new highs.
Tech will have its real day of reckoning when inflation starts to rise - unlikely as long as full employment remains a far off reality.
