The discussion amongst analysts has shifted from valuation multiples and what may otherwise be categorized as irrational exuberance to a discussion around earnings stability and sector-specific leadership.
The fact that technology stocks have not only rebounded from March lows buy have hit new all-time highs is worrisome to me. Seeing valuation multiples soar at the onset of a recession (we have not yet seen the impact of the COVID-19 pandemic meaningfully reflected in earnings yet) should make investors extremely uncomfortable.
I do agree that many large cap blue chip technology stocks (often grouped together as the "FAANG" five) have extremely insulated business models driven by competitive advantages and strong consumer sentiment for the products and services provided by these companies. I further acknowledge that these large-cap blue-chip tech names account for the lion’s share of earnings in the NASDAQ, disproportionately affecting the technology index.
That said, broad macroeconomic risks which may have long-term structural consequences for the broad economy could significantly adversely affect the earnings and stock prices of even the most insulated technology companies, including the FAANG grouping. I would encourage long-term investors to seriously consider the valuation multiples of any sector or specific companies one wishes to invest in before pulling the trigger. In my view, most tech names are simply too pricey to touch right now.
Invest wisely, my friends.
