Will tech shares ever rise again?

The technology sector has led the 12-year bull market but has slumped in the past few weeks. Is this the end of a golden era?

| More on:
Boxer falls down in the ring, indicating a share price performance low.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The share market rally of 2020, and perhaps the entire decade prior to COVID-19, was led by technology stocks.

For example, the S&P/ASX All Technology Index (ASX: XTX) put on 125% last year after the pandemic crash in March 2020.

And the Nasdaq Composite (NASDAQ: .IXIC) has gained a stunning 382% in the last 10 years.

But the last couple of months has seen a violent rotation from growth to value stocks, as investors fear increasing inflation and bond yields.

So is this the end of an era? Have technology shares had their day?

The golden years are done

Watermark Funds Management chief investment officer Justin Braitling reckons two big forces that buoyed tech are fading fast.

"The golden years of leadership from technology and growth seem, for the time being, behind us," he said in a memo to clients.

"Of the two major tailwinds pushing technology shares higher — the health crisis and low interest rates — one is abating (COVID) and the other is reversing (real interest rates)."

And interest rates are "likely to keep moving higher in the medium term", according to Braitling.

"The prospects of a second tech boom to complete this bull market looks less likely," he said.

"As the fundamental drivers of technology adoption are very much intact, the sector can still perform but is unlikely to lead the way it has in recent years."

It's not the end for tech shares though 

While they may no longer be market leaders, there is still plenty of upside for the technology sector, said Braitling.

"There is still tremendous momentum in each of the enablers of technology adoption: e-commerce, cloud and SaaS computing, the internet of things, and big data, to name the main ones," he said.

"This has become obvious to businesses and households awash with liquidity. They will keep investing given penetration is still early for many of these services."

The pandemic absolutely accelerated adoption of many technologies out of necessity. And while this revolution would slow down, the coronavirus has forever changed the mindset of many.

"COVID was a great awakening to the benefits of a digital economy — that message has not been lost on a single business we speak to," said Braitling.

"Those that lead in technology will invest to stay in front and the slow adopters caught wanting through the crisis will spend to catch up."

The fund manager noted, in the past 10 years, earnings per share (EPS) for tech stocks have outpaced non-tech businesses. This is despite the share prices for the tech sector climbing up.

T Rowe Price Group Inc (NASDAQ: TROW) portfolio manager Scott Berg said much the same in a webinar on Wednesday.

"Over time, if you invest with reasonable valuations, stock prices follow earnings and cash flows," he said.

"A lot of the most dynamic growth companies [today] actually have incredible economics — meaningfully different than companies back in the last tech bubble. They have very high margins, very low capital requirements, they have typically net cash balance sheets with tremendous operating leverage."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Technology Shares

Man with rocket wings which have flames coming out of them.
Technology Shares

Guess which ASX All Ords share is rocketing 16% on an asset sale

This share is catching the eye with a very big gain on Friday. But why is it rising?

Read more »

a man clasps his hand to his forehead as he looks down at his phone and grimaces with a pained expression on his face as he watches the Pilbara Minerals share price continue to fall
Technology Shares

Why are Megaport shares sinking 14% on Friday?

Why are investors hitting the sell button? Let's find out.

Read more »

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Why today is a big day for this ASX 200 AI stock

This company stands to benefit from 'one of the most profound transformations in the history of technology'.

Read more »

A man holds his head in his hands, despairing at the bad result he's reading on his computer.
Technology Shares

Why are WiseTech Global shares crashing almost 20% today?

Recent controversy has led to delays to an important launch and hit its revenues.

Read more »

Woman with speaker
Technology Shares

After falling 62%, this leading ASX 200 share could be gearing up for growth!

This industry-leading company looks like a turnaround opportunity to me.

Read more »

A man has computer-generated images rushing through his head indicating an AI (Artificial Intelligence) concept of a communication network.
Technology Shares

ASX investors are obsessed with Nvidia shares! Here's why

The global chipmaker reported a 94% increase in annual revenue in the third quarter.

Read more »

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer
Technology Shares

Own WiseTech shares? Here's what to watch at Friday's AGM

This could be one of the major events of the year.

Read more »

Woman and man calculating a dividend yield.
Technology Shares

This ASX tech stock is down 93% from its highs. Could Trump tariffs give it a boost?

The ASX tech stock could enjoy tailwinds from Trump’s threatened tariffs.

Read more »