Tech-fueled ‘everything’s awesome’ rally seems unstoppable

LONDON (Reuters) – Today’s $ 72 trillion question for investors: to buy or not to buy in the rally in global stocks? Despite inflated stock prices, politics and the pandemic, the answer from many is a resounding “yes”.

It’s not just because unprecedented stimulus measures – $ 20 trillion and more – are forcing a structural change in the way financial assets are valued.

It’s also due to years of societal change, innovation and now, pandemic, which could forever transform the way people work, study and shop – playing the dominant role of tech stocks.

So, while the resumption of coronavirus outbreaks and the impending US election have made some investors cautious, many stock bulls are on hold, having already increased the value of stocks worldwide by $ 24 trillion since the end of March.

As global stocks hit record highs, strategists say the swift shift from bear to bull was not only justified, but deserves to go further.

“The COVID pandemic has taken on existing trends – greater reliance on technology, online shopping, remote working, etc. – and supercharged them, ”said Benjamin Jones, senior multi-asset strategist at State Street Global Markets.

With tech stocks maintaining their spectacular gains, investors say the next leg of the rally will likely come in value stocks – so called because they trade at cheaper valuations than their growth-oriented peers.

Equities of course benefit from above-average equity risk premiums, the return that can be obtained by holding equities versus risk-free assets. Global stocks show an ERP of 4.6%, while for US stocks it is 4%.

This could erode over time, but for now interest rates appear to be firmly at the bottom.

As for valuations, they oscillate nearly 22 times the forecast earnings of the US S&P 500 .SPX index, the highest since the dot-com bubble in early 2000. But then, the index also changed radically with technology from afar its larger sectoral component.

Making up about a third of the benchmark, they are the ultimate beneficiaries of the pandemic at home, especially those known as FANGMAN – a broad tech group including Facebook (FB.O), Apple (AAPL.O), Netflix (NFLX.O), Google (GOOGL.O), Microsoft (MSFT.O), Amazon (AMZN.O) and chipmaker Nvidia (NVDA.O).

Their multiples of 80 to 100 times the futures earnings drove the market as a whole up.

Until a few decades ago, banking, oil & gas, and industrials made up the bulk of the S&P 500. These sectors typically trade at lower multiples, given volatile commodity prices and the needs of high capex – one of the main reasons for Britain’s underperformance this year. Reference FTSE.

“What’s strange about the market debate is that it is organized like this: look at the S&P 500 and the answer is that the stock market is expensive. Then you ask people what they like and they prefer a lot of secular growth, multiples stocks, ”said Andrew Sheets, chief strategist at Morgan Stanley.

The ratio of US stocks on a market-weighted basis to an equally weighted equity index is at its highest level since the 2008 crisis, indicating the dominance of the handful of big tech stocks in the market.

For a graph on the call rate on Put: here

The valuations make all the more sense because of the lower for longer interest rate environment, said Maximilian Kunkel, CIO of Global Family Offices at UBS.

“As a result, we remain constructive on risk assets even after the rally.”

Many others seem to agree. On the derivative markets, the put-to-call ratio of US stocks, a measure of positioning sentiment, is the lowest since 2010. The ratio is inversely proportional to the performance of stocks.

Some caution is warranted, however, given that asset classes of all stripes have won. A portfolio with a 25% allocation to stocks, bonds, cash and gold would have gained a record 18% in the past 90 days, BofA analysts calculate.

But the building is vulnerable to rising inflation, many say with return-sensitive investor holdings up $ 8.1 trillion over 18 months, according to Morgan Stanley.

Although prices have rebounded fairly quickly from deflationary territory, inflation remains well below central bank estimates, indicating that equity valuations will remain attractive.

The latest flow data shows investors are switching from cash to stocks.

“I would always say that investors are underweight equities and that provides a pretty decent backdrop for the recovery in risky assets,” said Jason Borbora-Sheen, portfolio manager at Ninety One Asset Management.

For a chart of SP500 yields versus US high yield yields: here

For a graph on the performance of the US market: here