What do you call Superman wrapped in a hurricane mixed with rocket fuel?
An unstoppable force?
Close. But the correct answer is Big Tech1.
I assume this is a reaction to the recent earnings reports?
It is. I still can’t believe the numbers.
I only briefly saw the headlines. Give me the details…
Well, there’s a lot to report, but here are some highlights. Amazon made $100 billion in three months for the third consecutive quarter. Google’s advertising revenue rose 69% from last year. Microsoft grew their cloud computing service by 50% year over year.
Not bad.
You want to hear something that’s definitely not bad? Facebook’s revenue grew by 56% over the past year. FIFTY SIX PERCENT!
Is that the same company who is despised by Congress, in an open fight with Apple, and competing with TikTok?
Yep. It’s also the same company whose revenue was already almost $60 billion during Q2 2020. Growing 50% off that base is mind blowing.
I don’t get it.
I don’t get it either. Apple also released nearly incomprehensible numbers but I think you get the point.
Yep, I read somewhere that the value of Big Tech is equal to 60% of Europe’s annual GDP. Can you believe that?
At this point I actually can. They’re undeniably the best companies in the world. On any given day you may be utilizing every one of them.
So what’s next for the Big Tech stocks? I thought trees don’t grow to the sky…
It’s impossible to predict the future. The value of these 5 stocks account for over one-fifth of the S&P’s entire market cap. Considering their earnings power, I wouldn’t be surprised to see that number at one-third someday.
So trees do grow to the sky…?
Well there’s one thing that may hold Big Tech’s stock performance back.
And that is?
Expectations.
Vague much?
Amazon’s Q2 2021 revenue came in at $113 billion. Yet the consensus estimate from Wall Street analysts was $115 billion. Their stock has fallen 4% since the announcement.2
Interesting.
Apple sold $40 billion worth of iPhones over the past 12 months…and their stock has been essentially flat since their earnings call.
That’s pretty ridiculous on the surface. However, we are dealing with a short, cherry-picked time frame to be fair. Who’s to say these stocks won’t exceed expectations going forward? And doesn’t every company have pressure from analysts to hit certain numbers?
Believe me, I am not a Big Tech bear. My point is two-fold. One, these companies may be the most profitable in the world for many years to come. Two, their stock performance may not be what we’ve grown accustomed to over the past decade.
So what if those things do come to fruition? What’s an investor to do when Big Tech isn’t a significant driver of the market’s returns?
Thought you would never ask. Are you ready for this bombshell?
Let me hear it!
You…diversify.
Cool man, cool.
I wish I had a better answer, but I don’t. We know the market is cyclical and that a single sector can’t stay hot forever.
What about in the short-term? Isn’t there something I can do if I am skeptical of tech stocks?
I would consider adding more dividend-paying stocks to your portfolio. Especially if you think we’ll see a gradual rise in interest rates, dividend-paying stocks have historically outperformed the market.
What else?
Think about adding more cash or bonds. I strongly recommend against making wholesale allocation changes based on intuition, but cash/bonds will provide downside protection if Big Tech stumbles and carries the market with it.
We good to wrap up?
I’ll leave you with one of my favorite sayings: “Happiness equals reality minus expectations.” We can’t predict either side of that equation for Big Tech.
1 In this context, Big Tech is considered Facebook, Apple, Amazon, Microsoft, and Google.
2 Time frame is July 30, 2021 through August 18, 2021.