| Equity | Revenue (YoY) | Earnings per share (YoY) | Share price 1 day after quarterly results | Share price 5 days after quarterly results |
|---|---|---|---|---|
| Nvidia | +122% | +168% | -6% | -15% |
| Microsoft | +17% | +20% | -1% | -6% |
| Alphabet | +14% | +31% | -5% | -6% |
| Super Micro Computer | +144% | +61% | -20% | -8% |
Macroeconomics and politics
Is a change in market dominance on the horizon?
5 min read 23 Sep 24
The technology sector has been sending out weak signals since the beginning of July. The price declines since mid-July, which initially culminated in a sell-off in the first week of August, were followed by an interim recovery, which was then interrupted by renewed price declines at the beginning of this month. From a purely technical point of view, the fact that the low of the first sell-off has not been undercut recently is good news, in our opinion. As long as this remains the case, this market phase looks more like a consolidation than a trend reversal. Nevertheless, we believe that caution is required.
Total return of the technology sector*, in % (USD)
Source: Morningstar, 13 September 2024. *Sector based on the MSCI ACWI Index. Past performance is not a guide to future performance.
From a fundamental perspective, market participants currently appear to be subjecting their expectations regarding the technology sector to a reality check. This is because the strong performance of recent years - driven by the expected A.I. revolution - has caused valuations and growth expectations to skyrocket. These market expectations now appear to have proved too optimistic in some cases.
Although the recently reported growth figures from companies such as Nvidia, Microsoft and Alphabet were quite robust, the companies were penalised with share price losses following the announcement of their quarterly figures. Nvidia's share price fell by 6% the day after the figures were published. A week later, the losses even totalled -15%. Alphabet also fell by 5% the day after its results were announced and the share price of Super Micro Computers, another A.I. favourite, plummeted by as much as 20%. These market reactions can be interpreted as signalling exaggerated market expectations. Nervousness is on the rise.
Source: Refinitiv, 13 September 2024. The information provided should not be considered a recommendation to purchase or sell any particular security.
The technology sector still has high valuations
From a valuation perspective, however, not much has changed. The valuation of the technology sector based on the forward P/E ratios is still around 50% above the twenty-year average.
Admittedly, a certain valuation premium compared to history is probably justified. After all, technology companies today achieve a higher return on capital on average than 10 or 20 years ago. In addition, the ‘new’ A.I. megatrend has rightly brightened the growth prospects of the sector as a whole. However, whether this justifies a valuation premium of 50% can at least be critically questioned. And this is exactly what the market seems to be doing at the moment. Further volatile phases can therefore be expected in the near future.
Forward P/E Ratio of the technology sector*
Source: Refinitiv Datastream, 13 September 2024. *Sector based on the MSCI ACWI Index. Past performance is not a guide to future performance.
Looking beyond the horizon can be worthwhile
As already indicated in previous market commentaries, we believe it is currently worth taking a look at market segments outside the technology sector and the technology-heavy US mega caps. This is because there are certainly areas of the stock market that we believe also have attractive growth potential and are valued much more favourably at the same time. Some of these areas were able to stand out positively during the recent weak phase in the technology sector.
These include utilities, for example. The sector has been one of the strongest this year and has provided stability in the last two months in particular. Nevertheless, the valuations of utilities are comparatively favourable overall. The ongoing energy transition, which is largely being driven by utilities, and the associated growth potential appear to have hardly been priced into valuations in many cases. The significant rise in interest rates since the Covid pandemic has weighed on the sector as a whole. However, with the expected interest rate cuts by central banks, the wind could now change and trigger a relief rally for many utilities companies.
One sector that could also benefit disproportionately from interest rate cuts by central banks is the property sector. REITs (real estate investment trusts) in particular have suffered greatly from the higher interest rates in the last two years. This could now change. The most recent market phase since the beginning of July, in which REITs have performed particularly strongly, can serve as a preview of what’s to come.
The two sectors mentioned above can also be found in the infrastructure sector. The enormous pent-up demand for infrastructure investments worldwide could therefore prove to be an additional tailwind in the long term. The starting position for utilities and selective REITs involved in growth markets thus appears extremely favourable to us.
Total return of selected sectors*, in % (USD)
Source: Morningstar, 13 September 2024. *Sectors based on the MSCI ACWI Index. Past performance is not a guide to future performance.
For anti-cyclical investors with patience and strong nerves, it could also be worth taking a look at certain regional stock markets. In addition to China, some emerging markets such as Brazil are currently particularly favourably valued. But there are also numerous bargains in Europe, especially among value stocks.
Even if it is probably still too early to talk about a change in market leadership, we believe it is already worth looking for attractive investment opportunities in less recognised stock market segments outside the technology sector.
The value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. The views expressed in this document should not be taken as a recommendation, advice or forecast.