In trying to explain the most baffling fact of 2020’s topsy-turvy markets, how tech valuations have swollen to bubble-era extremes even as a pandemic rages, people cite two things. Federal Reserve largesse, and hopes the coronavirus will be quickly contained.
But another, slightly scarier theory exists as to how the value of companies in the Nasdaq 100 has expanded by $2.9 trillion in this of all years. It’s that the Covid-19 crisis’s impact, or at least the social-distancing strictures it has forced upon the world, will prove to be permanent.
While not quite accepted wisdom, it’s a view coalescing in the minds of certain market watchers — that even if the virus is defeated, the behaviors it has engendered will live on.
The idea gets tossed around after weeks like this, in which the tech gauge jumped more than 2% and its price-earnings ratio topped 36 for the first time since 2004.
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“Even when things normalize post vaccine, do we go back to the old way of doing business, or have we just sort of fast forwarded?” said Rich Weiss, chief investment officer of multi-asset strategies at American Century Investments.
“The digital transformation initiatives have just rocketed us into the future, and that’s going to be the way of the future. So those companies’ valuations may be very justified,” Weiss said.
One way of quantifying how much investors expect of giant technology companies such as Apple Inc. and Amazon.com Inc. is to consider how much it will take for their profits to “grow into” existing valuations.
For instance, the Nasdaq 100’s price-earnings ratio of 36 compares with a 10-year average of 22. Assuming tech shares sit still, they’d need three years’ worth of almost 20% annual earnings growth to get multiples back to average.
Going by this logic, the market, consciously or otherwise, is doing more than just adjusting for a brutal but brief economic interruption. Rather, it’s repricing itself for a more profoundly altered reality — a world in which the urge to limit human interaction squeezes the old economy mercilessly while hastening the ascent of a digital and mostly automated new one.
“We’re going through a really troubled time right now. It has changed the way we live,” said Kim Forrest, chief investment officer of Bokeh Capital Partners. “We’re learning how to do business in this touchless world, and technology is at the core enabling it.”
Signs of lasting change are everywhere. Bankruptcies are piling up, altering the consumer landscape. A survey by CreditCards.com found more than 40% of people who spent money on movies and event tickets before the pandemic now plan to spend less.
Half of Americans aren’t eager to hit a bar, and more than one-third aren’t excited about sports games or movies, according to a recent survey by Bloomberg and Morning Consult.