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- Tech giants led major indexes lower during September’s sell-off but the sector is poised to rebound in the coming months, Seema Shah, chief strategist at Principal Global Investors, said Wednesday.
- Uncertainty around the pandemic’s trajectory could extend work-from-home trends and accelerate digital trends, she wrote in a blog post.
- The slowing pace of economic recovery also boosts the appeal of tech giants’ resilient profits and positive cash flow.
- The Federal Reserve’s plan to keep interest rates near zero for the foreseeable future will stifle bond yields and create a favorable environment for tech valuations, Shah added.
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With the recent tech sell-off out of the way, a top strategist expects the mega-cap stocks to rally higher into 2021.
Concerns around the upcoming US presidential election, rising COVID-19 cases, and deadlocked fiscal stimulus hammered traders’ bullishness through September. Though none of those reasons were enough to drive a slump, the combination led investors to balk at the tech sector’s lofty valuations and trim their bets. The broader market pulled back, and the growth favorites that led indexes’ rapid summer recovery became some of the biggest underperformers.
Yet the recent downturn should only be regarded as “a natural speed bump for the sector,” Seema Shah, chief strategist at Principal Global Investors, said Wednesday. The economic backdrop remains favorable for the FAANG coalition and other tech giants, and Shah sees three reasons the stocks will outperform in the months ahead.
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Lasting virus worries
For one, the pandemic advanced several growth trends across tech industries, and rising case counts suggest the boost is far from over. Infection rates are slowly trending higher in the US and throughout Europe. Deaths remain low and reopenings haven’t yet been reversed, but several European cities have constrained some business operations in hopes of curbing the coronavirus’ spread.
Any further limitation to physical business activity and socializing stands to keep Americans tied to tech services, Shah said.
“As such, the acceleration of digital trends for business, education, and households in the wake of the pandemic is unlikely to fade anytime soon,” she wrote. “The stay-at-home trade is still in vogue.”
‘Still some way to go’
The initial bounce in economic activity has played out, and most developed nations now face a slower and more challenging recovery. There is “still some way to go before the global economy returns to pre-pandemic levels,” the strategist said.
Upcoming earnings reports stand to show some of the long-term damage companies will bear. Uncertainty around the virus’ trajectory will also cloud companies’ outlook heading into 2021. The gloomy backdrop plays into the hands of tech giants, Shah said. The growth stocks’ healthy balance sheets, positive cash flow, and resilient profits will cement their position as a “relative safe haven,” she added.
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The Federal Reserve’s updated policy framework suggests rates will remain near zero for years to come and asset purchases will continue at their unprecedented rate. Investors can expect the accommodative policy to place significant downward pressure on short-term bond yields. Additionally, managed inflationary pressures will do little to aid long-term bond yields as the economy recovers, Shah said.
Tech giants, on the other hand, rely heavily on future profits for their valuations. The low-rate outlook creates a favorable environment for the growth picks and could steer more investors from Treasurys to the tech sector, the strategist said.
“Without evidence of a broader economic recovery and rekindling of inflation pressure, there is little in the fundamental market dynamics to suggest tech disappointment in the near-term,” Shah said.
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