Today we will take up all 3 of our usual sections to discuss the results of our DataTrek Tech Outlook Survey, which we ran last week. Thanks to all who participated! A few details before we get into the results:
- We had a total of 307 completed responses. As usual, the vast majority (98%) were from the DataTrek community. Seven responses came from social media.
- Every question was “Choose one” and responses were presented in randomized form where appropriate.
- One question explicitly asked the respondent if they thought US Big Tech stocks are “currently in an investment bubble”. As we discuss the survey we will note where replies differ meaningfully between respondents who answered “Yes” or “No”.
Now on to the results:
#1: What is the primary measure you use to evaluate whether an asset in an a “bubble”? (Choose one)
- Fundamental analysis: 37% of respondents
- Speed and magnitude of recent returns: 29%
- How often I hear it mentioned by non-finance people: 19%
- My impression of marginal buyers in the asset: 11%
- Excessive M&A valuations: 4%
Takeaway: from these answers we can formulate a definition for the investment term “bubble”, namely “an asset whose price moves quickly and dramatically above common perceptions of fundamental value”. That incorporates the answers of 66% of all respondents (the two most popular replies, bolded above). Among survey takers who felt US Big Tech is in a bubble, the total percentage of the same replies was slightly higher, at 73%.
Put another way: while other factors may play a role in determining whether a financial asset is in a “bubble”, in the end the assessment is #1) inherently analytical and #2) anchored in the idea that sharp upward moves in asset prices merit enhanced scrutiny.
#2: In your opinion, are US Big Tech stocks currently in an investment bubble? (Choose one)
- No: 56%
- Yes: 44%
Takeaway: this was a closer call than we expected, if only because DataTrek readers tend to be older and therefore have multiple firsthand experiences with investment bubbles (dot com, real estate, perhaps crypto currencies as well). Calling +20% of the S&P 500 a “bubble” is serious business, so seeing the split at just 6% over/under is quite striking.
#3: What do you expect the average price return for US Big Tech stocks will be over the next 12 months? (Choose one)
- 20% or more: 8%
- +5% to 20%: 62%
- 0% to 5%: 15%
- -5% to 0%: 4%
- -5% to -20%: 7%
- -20% or worse: 3%
Takeaway: respondents were overall bullish on Big Tech, with 70% seeing anywhere from +5% to over +20% further gains and most clustered in the +5% – 20% camp.
Those who said they felt Big Tech was already in a bubble (Question #2) were mixed on where these stocks would go in the next 12 months. Almost half (48%) said +5% to +20% (40% of replies) or +20% (8% of replies). Only 23% felt Big Tech would fall by either 5% – 20% (16% of replies) or over 20% (7% of replies).
#4: What fundamental/technical factor do you think is MOST responsible for the recent performance of US Big Tech stocks? (Choose one)
- Changes in Americans’ use of technology post-COVID: 33%
- Federal Reserve actions post-COVID market meltdown: 27%
- US Federal government stimulus: 12%
- Performance chasing by active managers: 10%
- Money flows into passive S&P 500 index products: 10%
- New equity investors buying stocks: 7%
Takeaway: while 33% of respondents chose a fundamental explanation for Big Tech’s recent rally, most (67%) did not and 39% pinpointed either Federal Reserve (27%) or Federal government stimulus (12%) as most responsible for the move. That’s more than think Big Tech’s move is primarily from Americans’ greater use of technology goods and services.
Interestingly, survey takers who said they felt Big Tech was in a bubble were much more diverse in their opinions about what drivers were artificially inflating asset prices. Only 15% thought it was fundamental (increasing Tech usage) and they tended to vote for “performance chasing” (16% of replies) and “new investors” (14% of replies) the same or almost as much as “Federal government stimulus” (15%).
#5: Let’s assume for a minute that US Big Tech is in a late 1990s-style bubble; what stage are we in right now? (Choose one)
- 1997: early in the bubble: 20%
- 1998 – 1999: the middle of the bubble: 61%
- Early 2000: the end of the bubble: 19%
Takeaway: even if Big Tech is absolutely in a bubble there’s still money to be made, according to our respondents. The percentage here (81% early-mid bubble) drops when we just look at bubble-believers but only to 66%.
#6: Of the following well-known names, which do you think is MOST over-valued? (Choose one)
- Facebook: 37%
- Amazon: 33%
- Apple: 18%
- Google: 7%
- Microsoft: 5%
Takeaway: we thought this was a throw-away question because of Amazon’s long history of +100x price-earnings ratios, but no… Facebook takes it with its current 29x forward multiple but a raft of concerns about the durability of its business model.
#7: Of the following well-known names, which would you feel most comfortable holding for the next 10 years? (Choose one)
- Microsoft: 36%
- Amazon: 29%
- Apple: 15%
- Google: 14%
- Tesla: 4%
- Facebook: 2%
Takeaway: two clear winners here, Microsoft and Amazon, with everything else an also-ran. We had a flashback to an old saying in corporate America – “You’ll never get fired for buying IBM computers” – and wonder if MSFT and AMZN’s recent runs may be partly due to their popularity as defensible long-term investments.
#8: Do you think US Big Tech will, on average, outperform the S&P 500 over the next 12 months? (Choose one)
- Yes: 80%
- No: 20%
Takeaway: this was the first of three strongly definitive results out of the entire survey, and even those who think Big Tech is in a bubble were inclined to believe it would outperform over the next year (66% of replies). This does force us to ask the logical question of “who is left to buy?”
#9: Do you think Technology as a sector will outperform the S&P 500 over the next 10 years? (Choose one)
- Yes: 85%
- No: 15%
Takeaway: this was the most definitive result of the entire survey. Even 76% of the “Big Tech is in a bubble right now” respondents think Tech is a long-run overweight.
#10: If you could only own one region’s Tech companies for the next 10 years, which area would you choose? (Choose one)
- US: 83%
- China: 9%
- Asia ex-China: 7%
- Europe: 1%
Takeaway: the last of the three most definitive results, that US Technology is the place to be for the long term relative to other regions’ tech stocks. That is not just a testament to what American public companies have done in the last few years, but also an implicit endorsement of US venture capital. Microsoft and Amazon may well prosper over the next decade, but how well US tech stocks do in the next 10 years is just as much a function of companies that are not even public yet.
Summing up, 3 things struck us about these results:
- Bubble or no bubble, respondents have a lot of confidence in Big Tech stocks. That shows up everywhere in this survey, even among respondents who believe current equity prices are materially too high.
- A solid majority of our survey takers believe non-fundamental reasons are driving Big Tech’s gains. This seems to imply that they view valuation/macroeconomic inputs like ultra-low interest rates and outsized fiscal stimulus as quasi-permanent since their overall bias is still bullish.
- The contrarian in us wonders what it would take to change investor perceptions since many answers exemplify the problem of excessive tech stock popularity. Seeing 4 in 5 investors agree on anything is rare, but that’s how many in our survey expect Big Tech to outperform.
Final thought #1: for most of our career, Technology has been a high-beta play, an expression of almost hubristic confidence in intellectual capital, a gutsy bet on human ingenuity… But now Tech is simply the safest sector in highly uncertain times. Perhaps “Big Tech” is different than earlier forms of Technology stock investing because the business models here touch so much more of the global economy and our lives than ever before. In the end, that is the best explanation for why Technology stocks writ large are not in a bubble.
Final thought #2: when Marc Andreessen published his August 2011 essay “Why Software Is Eating the World”, Technology was 18.6% of the S&P 500; nine years later and adjusting for some sector classifications, Technology is now 33.4% of the S&P. If our respondents are right, the 10th anniversary of Marc’s article will see Tech with an even higher weighting and if you want to throw in Amazon (4.9%, technically Consumer Discretionary) it could easily be 40% in 2021. Maybe that’s a bubble. Or maybe – and this is our opinion – it is simply reality.