Mega-Cap Tech a Safe Haven

Economic

Stocks

Summary:

Year-to-date, technology has outperformed the broader market largely given the prevalence of low leverage, high profitability and consistent earnings across many names in the mega-cap tech space. Technology serving as a haven in periods of market volatility is a distinct change to the late 1990's where the sector was the source of the volatility.

Equities have officially entered a correction. Both global and domestic stocks have fallen by at least 10% below their summer peak. Volatile portions of the market, notably small cap and early growth companies are down far more. And while large-cap technology companies have not been immune to the weakness, for the most part they have held up better than the broader market. I think this can continue as investors put a premium on higher quality, companies with the ability to generate cash-flow.

Since the summer peak, the global technology sector has outperformed and remains the top performer year-to-date (see Chart 1). Tech's resilience owes much to the fact that the mega-cap tech names tend to have low leverage, high profitability, and consistent earnings. In other words, they are high quality companies.

What investors Want

For investors old enough to remember the late 1990's, the idea of tech as a haven during periods of market volatility seems odd. These were the stocks that led the market bubble on the way up and were punished the most when the bubble finally burst in 2000. What has changed? The simple answer is the companies in this sector are more mature, less volatile, and more profitable.

One important reason that large-cap technology stocks have held up, despite the surge higher in interest rates: these companies generate strong cash flow. Contrast this with their younger, early-growth cousins. Early growth companies are down roughly 30% from the July peak. The backup in interest rates has been particularly punishing for these companies because their cash-flow is in the distant future. Put differently, a higher discount rate has a more negative impact on early growth companies than those with significant near-term cash flow.

The fact that these companies are more mature and more profitable, also means that, unlike the 1990's, many of the mega-cap tech companies trade close to a beta of one. In other words, they generally trade with no more volatility than the broader market. This is important because in the current environment investors are demonstrating a clear preference for lower beta companies and an aversion to excess volatility.

The other distinguishing characteristic of these companies: Not only are they highly profitable, but their profits are remarkably consistent. The large, ‘platform' companies have strong entrenched user bases and consistent demand. And with interest rates high and the economy likely to slow from here, consistency is becoming more important to investors.

Large Cap Tech = High Quality

Tech outperformance looks less strange viewed through a factor perspective. While the market can rally into year-end, investors are likely to prove more risk averse than they were earlier in the year. Higher rates, tighter financial conditions and the prospect for an economic slowdown have left investors with a clear preference for safety and an aversion to volatility. Our view is that mega-cap tech names offer these quality characteristics. They are highly profitable and, perhaps somewhat surprisingly, reliable.

Source: Black Rock

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Risk Disclosure

The risk of loss in trading financial instruments such as stocks, FX, commodities, futures, bonds, ETFs and crypto can be substantial. You may sustain a total loss of the funds that you deposit with your broker. Therefore, you should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.

No decision to invest should be made without thoroughly conducting due diligence by yourself or consulting with your financial advisors. Our web content might not suit you since we don't know your financial conditions and investment needs. Our financial information might have latency or contain inaccuracy, so you should be fully responsible for any of your trading and investment decisions. The company will not be responsible for your capital loss.

Without getting permission from the website, you are not allowed to copy the website's graphics, texts, or trademarks. Intellectual property rights in the content or data incorporated into this website belong to its providers and exchange merchants.

Recent Searches

Top Searches

Markets

Analysis

User

24/7

Economic Calendar

Education

Data