Back then, the tech-dominated index had traversed the 5,000 level for the first time on little more than fine hopes about how the technologies of the new millennium might pave the way for step changes in growth and profits.
For some companies living through that fervour, the end was, unknowingly, already in sight. Stocks had been priced for success before anyone knew who had the winning technologies of the future. That left some vulnerable companies fatally exposed to a change in market fortunes.
So with the same index, but many different stocks, achieving new highs last week above the 6,000 level, investors may be understandably interested in where the latest episode in this long story might take us (1).
Without wishing to invoke dangerous complacency, it’s still true to say that today’s market is a bit more savvy. Success stories are rewarded – Apple and Facebook for example – while failings are punished – Twitter and Lenovo in the recent past (2).
In the intervening years since 2000, business models have been tested to the limit, so companies that have survived the development phases of previous technologies ought to be better placed than ever to exploit and dominate future new markets.
Meanwhile, US corporate earnings are rising again after a long drought. The S&P 500 technology companies that have reported their first quarter earnings so far – around half – are showing year-on-year earnings growth of about 15% (3). Nasdaq will have been responding to that lately.
However you can’t completely eradicate a degree of exuberant optimism when an exciting new idea comes along and it’s all the harder to do so when growth generally is scarce. The dotcom boom and bust happened almost a generation ago, too far back for the iGeneration to remember.
When Snap floated on Nasdaq in March, there were questions about what value there really could be in a company based on the simple premise that tomorrow’s social media would be based on photo sharing rather than words.
The answer arrived at on the first day of dealings was about US$33bn, and that for a company that had just made a half-billion-dollar loss the previous year (4).
Talk of the amazing growth opportunities afforded by robotics, artificial intelligence, driverless cars and a post-smartphone world are eerily reminiscent of the late 1990s and provide plenty of scope to rate companies partly on the basis of future leaps forward.
However, it would be fair to say that, technology companies look as if they face a bright future. Today, mostly the revenues and profits are real and valuations, while high, are decidedly real-world and not all that much higher than for the broad US market (5).
The big bull run in US government bonds may look like it may have run its course but that just increases the potential for formerly cautious investors to switch to equities as a way of maintaining the buying power of their money.
As ever, there are risks and, should investors be propelled to take a more cautious view of the world economy, technology companies would be likely to suffer. Equally, at home, president Trump’s ambitious economic plans could transmute into a headwind if Congress fails to approve a substantial rise in public debt.
However, risks work to the upside as well as the downside, so unexpectedly positive developments in the fields of technology could force prices higher just as disappointments can work in the opposite direction.
Uber autonomous taxis have already started to pick up passengers in Pittsburgh and Amazon Prime Air has been testing drones at its outdoor facility in Cambridge, suggesting a pace of change from concept to reality the like we may never have seen before (6).
Almost exactly two years ago, when the Nasdaq first regained the 5,000 level, it would have seemed quite reasonable to make the case that technology stocks were overvalued, and a lot of percentage point gains have flowed under the bridge since then (7). If America’s technology giants continue to produce earnings that are better than expected then their shares might continue to do the same for a while longer.
In technology as much as anywhere else, diversification can be the key to eventual success. It enables an investor to embrace inevitable disappointments while maintaining an exposure to tomorrow’s winners.
Fidelity’s Select 50 list includes a number of funds with sizeable exposures to technology. Among them are the Rathbone Global Opportunities Fund, which currently has almost a quarter of its portfolio invested in the technology sector. Along with familiar US names such as Amazon and Facebook, the Chinese internet giant Tencent resides among the Fund’s largest holdings.
Others include the JPM US Select Fund and Old Mutual North American Equity Fund. Both feature a substantial exposure to US technology companies as well as a broad spread across America’s other major market sectors.
Graham Smith, Market Commentator
Graham has worked for some of the biggest names in the City, including Schroders, Invesco Perpetual and Gartmore, as well as the World Economic Forum in Davos. Today he writes independently on a range of market and investment issues.
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1 Nasdaq, 03.05.17
2 Bloomberg, 03.05.17
3 FactSet, 28.04.17
4 Bloomberg, 03.02.17 and CNBC, 02.03.17
5 Wall Street Journal, 28.04.17
6techcrunch.com, 14.09.17 and Cambridge News,
7 CNN Money, 10.03.15
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