Global society has never relied so heavily on US ‘Big Tech’ as now, during the coronavirus pandemic, to keep us working, communicating and entertained from our own homes. These companies look more dominant than ever, and their shares have not just been resilient during the first half of 2020 but buoyant, driving a recovery in the US stockmarket.
While the lockdown imposed in response to the virus has choked the US economy, pushing it into its first official recession – or period of contraction, rather than expansion – since 2009, the S&P 500 Index of the largest US companies’ shares had returned to its pre-2020 levels by early June.
‘Big Tech’ drives US market recovery
It is worth recalling that March 2020 saw the sharpest US stockmarket downturn since the global financial crisis, with the market plummeting by roughly one-third from its February 2020 highs. Yet the recovery has been swift, and much greater than across European stockmarkets, which had only regained some of their losses for the year by early June.
Let’s compare the performance of the US index, S&P 500 with the Stoxx Europe 600 Index of the largest European (including UK) company shares, from their 2020 lows on 23 March. While the European index had recovered 34% by 5 June, the S&P 500 had rebounded 43%.
The relatively strong performance of the US market has much to do with the technology stocks that feature heavily in the index, accounting for around one-quarter of its value. Past performance is not a guide to future performance, of course.
The group of technology giants often referred to as the FAANGs – being Facebook, Apple, Amazon, Netflix, and Google (whose parent group is called Alphabet) – plus Microsoft, had a combined value of roughly US$6 trillion, as at 9 June 2020. To put this in perspective, the total market capitalisation of the FTSE All-Share Index of UK-listed company shares is in the order of £2 trillion – less than half the value of these six companies.
Shares in Big Tech are highly valued as these companies are widely seen to offer the prospect of stronger, more reliable growth than many traditional sectors, like energy and finance, that face challenges in this period of economic stress.
Rather than being derailed, their progress has arguably been catalysed by the pandemic, as they have met the needs of businesses and households through lockdown in a way that would not have been possible even a few years ago. With hundreds of millions more people around the world staying home or working remotely, services like home delivery and cloud computing have been in greater demand.
Are there any value opportunities?
As ever, a challenge for investors in company shares is not only to invest in successful companies, but to do so when they are not overvalued.
When compared to European and UK stockmarkets, US shares look more expensive by many measures. The price-to-earnings (PE) ratio – which compares a company’s share price with the latest annual profits per share – of the S&P 500 Index stood at 23 at the end of May 2020, compared to only 15 for the Stoxx Europe 600 Index. A higher PE ratio indicates that investors are willing to pay higher share prices today because they expect earnings to grow in the future. These expectations may or may not end up being justified.
The high value of the technology-dominated US stockmarket overall is largely a function of investors’ ongoing preference for fast-growing companies. Meanwhile, companies that are considered to have less reliable growth prospects have been shunned. This has created an extremely wide gulf in value between the two.
Whilst the overall US stockmarket might be expensive, there are pockets of value in sectors and stocks that were sold off indiscriminately in early 2020 and have yet to recover. For long-term investors, there could be opportunities among these unloved stocks that may be overlooked by other investors.
A selective approach could be as important as ever, though. Given the acute uncertainties facing many businesses in the current climate, it is important to examine a company’s financial health and the ability of its business model to survive this crisis.
We believe that in the US as elsewhere, there are still opportunities for patient investors who can remain focused on the long term.
Please bear in mind that M&G is unable to give financial advice. The views expressed here should not be taken as a recommendation, advice or forecast.
Of course, all investments carry the risk of loss. When you're deciding how to invest, it's important to remember that the value of investments 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.