Investors are getting ready to reposition their portfolios for the post-pandemic world. That means moving money out of big tech, which did amazingly well in the work-from-home economy, and into more cyclical sectors, like manufacturing.
But hold on a moment — big tech might have another ace up its sleeve.
Next week’s earnings calendar is packed with high-profile performance reports from Google, Microsoft, chip maker AMD, Apple, Facebook, Amazon and Twitter.
Solid earnings from these companies could mean another rally in tech stocks, according to Wedbush Securities analyst Daniel Ives.
“We believe (first quarter) earnings over the coming weeks will be a major positive catalyst for tech names,” given the sector’s robust fundamentals, Ives said in a note to clients last week.
And as tech stocks go, so goes the market, because they are among the biggest stocks in the major equity indexes.
Of course, it will be many months until we know how much of the pandemic-driven remote way of life that boosted tech company’s margins last year will continue once when the economy fully reopens.
Even so, there is plenty to be optimistic about in the sector. Businesses are preparing to let workers continue to log in remotely after the pandemic, which means a continued reliance on gadgets and services. And some of the transformation that has occurred over the last year are likely to stick, like more digital meetings or virtual doctor’s visits.
A digital transformation is underway, and it could bring about the next multiyear rally for tech companies, according to Ives. That said, it might be tricky for investors to determine whether to put money into cybersecurity, artificial intelligence or cloud computing at this point.
“Today we estimate 35% of workloads are on the cloud with a doubling of workloads on the cloud expected by 2023,” he said.
So, although valuations for tech shares are sky high — even after the recent sell-offs — there is reason to believe that those stocks will continue to climb even higher. The growth prospects might just outweigh the high stock prices.
Of course, there are some clouds on the horizon for big tech as well.
The regulatory environment could change under the Biden administration. And the White House is intent on raising corporate taxes, which could hit tech companies hard.
President Joe Biden is also looking to raise capital gains taxes on the wealthy. This caused stocks to tumble last week. A change in tax liabilities could change how people invest in the stock market.