Don’t doubt the gods.
That was the lesson learned over the summer of our discontent, when the pandemic exacerbated already entrenched trends favoring a wholesale digitization of the human experience.
The likes of Amazon, Apple, Facebook, Netflix, and Google, benefited handsomely from lockdowns which made their services even more indispensable than they already were. But that’s not all. Their shares were also buoyed by the extent to which pandemic effects reinforced the “slow-flation” macro regime and attendant duration infatuation in rates, to which the fate of secular growth stocks is tethered.
As if this perpetual motion machine needed any extra fuel, a retail options frenzy and an institutional pile-on, turbocharged things, leading to a blow-off top (of sorts) in late August.
Of course, part and parcel of the market’s love affair with big-cap, US tech is down to revenue and profit growth — who can grow the top- and bottom-line in a world where there’s no growth? Well, big-cap, US tech, that’s who.
SocGen’s Albert Edwards revisits this in his latest, out Thursday. “Although equities have not de-rated in absolute terms in the US, the aversion to earnings cyclicality in favor of certainty advances onwards within the equity market in the same way that equities as an asset class continue to de-rate versus bonds,” he writes. “That is the essence of the Ice Age.”
This whole dynamic would be turned on its head in the event we were to see a repeat of the dot-com bust, during which, as Edwards reminds you, “US IT shares were exposed as cyclical imposters masquerading as growth stocks.”
The only other way for these trends to reverse is if someone flips a switch and the macro dynamic suddenly becomes sustainably reflationary, an outcome that seems far-fetched for any number of obvious reasons.
Earlier this year, Edwards called the bubble in FAANG stocks “nonsense on stilts” and warned that market participants should “embrace the coming crash.”
That was in May. It goes without saying that mega-cap US tech has performed quite well since then. But before you go chastising Albert, remember that it’s not just incorrigible, sell-side bears who made pessimistic calls in May and then reiterated them later, even after seeing equities run higher. Crocodile tears for ol’ Stan:
You’ll note that as late as last month, Druckenmiller was still calling equities an “absolute raging mania,” and those type of bombastic descriptions have been echoed by a veritable who’s who of the legendary investor pantheon. So this is one case when you can spare Edwards the grief. He’s actually been less bearish than some of the most recognizable names in finance.
“In the current recession, relative IT EPS has surged higher due to its unusual lockdown nature,” Albert wrote Thursday.
Note that this discussion is a bit more convoluted than it needs to be due to the distinction between Tech and Comms Services. I’d encourage you to just wave that away in your mind as you ponder it all — I personally think that “distinction” is largely meaningless.
Edwards goes on to caution that “optimism is fraying at the edges with recent disappointing earnings results beginning to undermine the growth qualities of US IT.”
That’s a pretty bold thing to say ahead of big-tech earnings, but Albert isn’t the shy type and besides, we’ve already seen one instance of the pandemic bump wearing off (visual below).
The key point (or one key point — there are actually several in Albert’s latest) is that, as Edwards suggests, “maybe the main threat to the US IT sector and FAANGs specifically isn’t just from mounting antitrust pressures or the ongoing upward drift in US bond yields.”
Generally speaking, those of a heretical persuasion (those who doubt “the gods”) lean heavily on looming antitrust probes and the notion that the macro backdrop could pivot against secular growth shares, especially in a world characterized by huge fiscal stimulus outlays in advanced economies.
What Edwards is suggesting, is that secular growth darlings might be more cyclical than you think. “The growth universe is now so puffed up that any sniff of cyclicality could lead to a 2001-style valuation collapse,” he cautions.
Finally, those interested in updated versions of the charts from Gerard Minack (most recently featured here in Google antitrust coverage) will note that they are even more dramatic after the summer.
“It is shocking quite how reliant the US equity market has become on just six mega-cap stocks,” Albert adds. “Because it emphasizes the risks if, for any reason, the bubble in the FAAANM stocks bursts.”
That was super interesting tail risk to consider. Growth stocks are not growth stocks, they are cyclical stocks, because clearly one thing is clear that these are Pandemic stocks, they are rewarded for that, but they are also assumed to benefit in growth challenged world, but if that is a big fat lie, then maybe not, that would shock for sure, excellent idea to ponder for a resident contrarian.
As Neil Gaiman pointed out in American Gods (and you implied in your linked piece above) humans invent their gods and like Tinkerbell, they only live as long as people believe in them. Thor and Baal are gone. Our investment and money gods are believed in for now but things can change. After COVID becomes less of an influence in two or three years what will happen to Amazon and other gods? Up? Down? Stay the same?
Investors latch onto themes. They will keep buying into the themes until they no longer work in the real world. Then they sell. Today’s theme is that tech stocks are secular growth vehicles and don’t hit rough patches like any other sector. In the long run, tech really is a growth sector- but prices have outrun reality in my view, and tech hits slow or no growth patches just as any sector does. And competition or regulation will also be a limiting factor. Caveat emptor.
FANAMA reads much better than FAAANM 🙂