HAMISH MCRAE: Big Tech’s investing dilemmas

Big Tech is back in style. The rising stock prices of the US giants have pushed the S&P 500 index up more than 20 percent from last October’s low, so technically it’s a bull market.

Apple, the most valuable company of them all, reached a market cap of $3 trillion on January 3, 2022, but dropped to around $2.2 trillion early this year. Now it’s almost back to that $3 trillion.

Its big rival, Microsoft, is worth about $2.6 trillion, up 45 percent this year, and at an all-time high. And while some of the other members of the clan – Amazon, Alphabet (Google), Meta (Facebook), Tesla and so on – are all below their long-term peaks, they are all soaring in 2023.

Indeed, the price of Meta has more than doubled. It is this rise in the top six companies that has fueled the bull market – and incidentally saved the portfolios of many shareholders here and in the US.

The rest of the US market has moved more or less sideways this year, as has the FTSE 100, which is up less than 2 percent.

All this despite fears of a recession in the US and here, despite the relentless rise in interest rates and despite many commentators’ expectations, including this one, that sentiment would shift from growth to value. But it didn’t happen.

Apple and Microsoft are great companies, but both have price-to-earnings (P/E) ratios above 30. That’s pricing a lot of growth. In contrast, the US blue-chip bank, JP Morgan Chase, is at a P/E of 10.5, while Shell, Europe’s largest oil company, is at 5.3. By pretty much any calculation, that should be cheap. So what’s up?

Part of the explanation must be artificial intelligence (AI), as argued in last week’s column. We know something big is happening with the combination of AI and big data, but as with all leaps forward, we can only guess at its long-term economic implications. So the hunt is to find a way to invest in it.

There’s the new trillion-dollar company, Nvidia, whose share price has tripled this year. Nvidia has been around since the 1990s and has a successful track record as a software developer, so it’s not a flash in the pan. But it’s one company, and perhaps a safer way would be to spread funds across the stocks of the other tech giants, all of which are investing massively in AI, Microsoft being perhaps the surest bet.

It is quite possible that the biggest beneficiaries of this revolution will not be the companies developing the technology, but those using it. Remember the lesson of the 1849 California gold rush, that the lasting money was made not by the miners themselves, but by the people who sold their shovels—the equipment the ’49ers needed to buy.

But we don’t know the shovel sellers of this gold rush yet. Another part of the explanation is that there is still a lot of liquidity. Investors have been burned by the experience of 2021, where they injected money into special purpose acquisition companies – companies set up in New York to invest in other ventures, without specifying where the money would go.

Handing out a blank check was a crazy idea, and a lot of money was lost. But everyone still wants to get into new technologies, and since big tech has to do the same, it makes sense. This explains half of the story – the boom in big tech – but not the other half – value stocks?

Here I think the problem is that all value plays have flaws. Stocks are cheap for a reason. Banks’ profits are generally high, but recession fears are forcing them to set aside larger provisions for bad debts, and the sector is an easy target for cash-strapped governments.

Oil? Similar objections, plus some investors won’t touch them. Mining faces much the same resistance. Retail is threatened by changes in buying patterns, consumer goods by economic slowdown.

The question is whether the low valuations are paying too much attention to these negative influences, and for those of us who value value investing, the answer is yes. But we haven’t won the argument yet.

What is generally clear is that the recovery in US equities is narrowly based, which makes it vulnerable. ‘Sell in May and go away’ has been bad advice for Big Tech investors so far, but this summer feels like it’s going to be a bumpy one.