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.
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.”