- Howard Marks broke down the bull argument for market-leading technology stocks in his latest memo, and said there is “obvious merit” in their dominance.
- The Oaktree Capital’s co-founder criticized tech skeptics who underestimate the ability of tech leaders, and said “to be bearish, one has to have a thesis on why they should fall.”
- Market-leading tech companies such as the FAAMG stocks (Facebook, Amazon, Apple, Microsoft, and Google) are up 36% this year, and can expect to go a long way, as the COVID-19 crisis has led to a digital transition, he said.
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Howard Marks broke down what is behind the stock market’s recent rally in his latest published memo.
The S&P 500 was up 50% from its March lows on Friday, driven by overall investor optimism surrounding economic stimulus and the prospect of the development of a successful COVID-19 vaccine.
Technology stocks have outperformed this year, even with the economic meltdown and rebound. The Nasdaq has soared to all-time highs, driven by record peaks in the share price of companies such as Facebook, Amazon, Apple, Netflix, Google, and Microsoft.
Goldman Sachs has predicted the S&P 500 could rise 7% from current levels and hit 3,600 points, if markets price in a “comparatively more optimistic US GDP forecast.”
Marks, the co-founder and co-chairman of Oaktree Capital, said FAAMG stocks (Facebook, Amazon, Apple, Microsoft, and Google) are up 36% this year, against just a 4% rise in the S&P 500.
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Marks said there are a few reasons there is “obvious merit” in the bull argument for Big Tech:
- They scale more rapidly than large companies in the past, protecting them from business cycle swings.
- The COVID-19 crisis has accelerated their growth, as they benefit from the massive transition to digital work and learning.
- Despite regulatory risks, their technological advantages and network effects (value of service dependent on the number of users) give them greater protection against competitors.
- All 5 companies are sitting on huge cash piles, as their cash holdings exceed debt.
- High price-to-earnings ratio indicate that investors expect higher earnings.
“To be bearish, one has to have a thesis on why they should fall,” the billionaire investor wrote. “Or else you would have to bet on the non-tech sectors to decline a great deal and pull down the averages – despite the fact that they’re already down a lot.”
A current boost in tech adoption, combined with the Federal Reserve’s record-low interest rates, has helped justify the high valuations of tech and software stocks.
“If instead the tech giants were flat against this backdrop – or had just performed in line with the rest of the index – we’d probably say something was wrong,” Marks said.
At the same time, he said the best companies’ stocks can become overpriced. Citing examples from 1968, he said both IBM and Xerox were expected to outgrow other companies and prove their resilience during economic cycles, but their shareholders lost all their money five years later.