By David Randall
NEW YORK (Reuters) – A weaker-than-expected election performance by Democrats and fears of new coronavirus restrictions have prompted investors to double down on high-flying technology stocks, which have come roaring back in recent days to put the Nasdaq within striking distance of a record.
Since Election Day, the tech-heavy Nasdaq Composite is up 6.6%, easily outpacing the 4.2% gain in the broad S&P 500 over the same time. This was partly driven by investors and traders unwinding trades placed on pre-election assumptions of a Democratic sweep which they thought would usher in higher taxes and more regulation.
Polls had forecast Democrats would solidly win the presidency on Tuesday, extend their control in the House of Representatives and potentially win control of the Senate. While Democratic candidate Joe Biden looks likely to win the presidency, the margin of victory appears to be razor thin; Democrats lost seats in the House and the Senate is evenly divided ahead of two runoff elections in Georgia on Jan. 5.
The result leaves Democrats in a weak position to push through a progressive agenda of increasing corporate and capital gains tax rates, said Steve Chiavarone, portfolio manager at Federated Hermes.
Investors had been expected to sell high-flying tech stocks and lock in current capital gains tax levels ahead of a strong Democratic showing in the election.
But there will still likely be some tax-motivated selling of technology stocks at the end of the calendar year ahead of the Jan. 5 Senate runoff election, Chiavarone warned.
“Even though a Georgia Senate runoff is a risk in the eyes of the Street, both of those seats going blue is a highly unlikely scenario,” said Dan Ives, an analyst at Wedbush Securities, who sees a risk of tax-motivated selling in late December but expects tech stocks to rise another 15% through the end of the year.
Beyond the short-term impacts that have swung tech this week, investors said the long term reasons to own tech remain.
“Tech has been getting cheap, at least relative to where it’s been, and that sets it up nicely if we have to have a move back to a stricter stay at home mandate,” said Jim Paulsen, chief investment strategist at The Leuthold Group.
Apple, for instance, now trades at a price to earnings ratio of 35.1, compared with its 52-week high of 40.9, while Amazon.com Inc trades at a P/E of 94.9, compared with its 52-week high of 152. Microsoft trades at a trailing P/E of 36, down from its 52-week high of 40.2, while Facebook trades at a P/E of 34.9, down from its 52-week high of 38.8.
Spiking coronavirus cases may also prompt investor demand on the view that record high cases in the United States will prompt state and local authorities to impose new economic restrictions. [FWN2HQ12G]
“You are seeing (COVID-19) flare-ups and real issues throughout the world, and it’s the same types of companies – the Apples, the Netflix’s and PayPals – that have fared so well during the pandemic that investors believe will continue to do well if we have another form of an aggressive lockdown,” said David Marcus, chief investment officer at Evermore Global Advisors.
Overall, investors will likely remain bullish on technology stocks until there are greater signs that the broad economy has regained its footing and coronavirus treatments and vaccines are widely available, said Brian Jacobsen, senior investment strategist for the multi-asset solutions team at Wells Fargo Asset Management.
Tech stocks “are the ones that have been able to prove that they have very resilient business models to this new economy that we’re going through,” he said.
Still, some investors cautioned about the risks of betting too much on tech.
“The idea that those big tech companies are the only game in town defies the way the economy functions,” said Bill Smead, chief investment officer at Smead Capital Management.
(Reporting by David Randall; additional reporting by Elizabeth Howcroft in London; editing by Megan Davies)