Writing for WealthManagement.com, David Trainer, president of New Constructs, gives reasons why there is no tech bubble in five charts. Although the S&P and NASDAQ are up, he contends we are not in another tech bubble for the following reasons:
- Growth expectations are significantly lowertoday
- Margins shouldn’t regress to tech bubble lows
- Cheaper valuations are partially due to lower cost of capital
- Tech sector growth and profitability are leading the market (see Tech and energy stocks top performers in 2nd quarter)
- Positive free cash flow yields
Trainer concludes, “Warnings of a new tech bubble paint the market with too broad of a brush. Instead of selling everything and waiting for the crash, investors should focus on performing fundamental diligence and separating the story stocks from the companies with the cash flows to support their stock prices.”
The takeaway
Trainer’s article argues that you should be focusing on the individual companies and their fundamental financial stability, rather than lumping all technology stocks together in one group.
This point was dramatically illustrated several days after the article was released when Facebook stock dropped by 20%, losing about $120 billion in value in its largest one-day drop ever, and Apple rose by 6% after reporting earnings within a few days of each other.
As we always stress to our clients, diversification is key. When one asset class is down, several others may be on the rise. The same goes for individual companies within those asset classes.
The technology sector has been performing extremely well lately. We are keeping a close eye on this and all other sectors as we monitor changes in the economy to see how they will affect your portfolio. Contact us if you have any questions.
