While big tech has shouldered the load, the Nasdaq Composite is also home to 700 health-care and biotechnology companies that have stoked investor interest as they search for ways to treat the coronavirus.
As harrowing as it’s all been, with the pandemic putting 30 million American jobs at risk, just as shocking has been the ability of technology stocks to shake it all off. You’d barely known anything was wrong if your only guide was the Nasdaq Composite Index, which after its fourth straight advance Thursday erased year-to-date losses that in March had swelled past 20%. Propped up by companies whose online and automated businesses have proved bulwarks amid a stay-at-home scourge, the gauge is up 30% in two months.
The all-weather resilience of companies like Amazon.com and Regeneron Pharmaceuticals has made the Nasdaq the envy of markets, at a time the average U.S. stock is down 18% and forecasts for everything from the economy to earnings to the virus’s trajectory remain hopelessly scattered. That it has occurred as older industries languish — banks, retailers and energy companies, for instance — is raising questions about the kind of world investors see emerging from the lockdown.
“What does the new economy start to look like? To me, this makes the case for tech,” said Jack Janasiewicz, a portfolio strategist at Natixis Investment Managers, which oversees $1 trillion. “Everything we think about has to revolve around technology because it has made all this stuff available for us. This just highlights the idea that we need tech and it needs to be one of the core positions in your portfolio.”
Combined with strong balance sheets, big tech’s online focus has kept the companies intact while much of the economy reels, repudiating skeptics who said their high valuations would leave them vulnerable when the bull market ended. The rally gained momentum late last month after solid earnings from Google parent Alphabet Inc., Facebook Inc, Microsoft Corp. and Tesla Inc. — which make up more than a fifth of the index. The advance was delayed last week when Amazon.com Inc. and Apple Inc. spooked investors with cautious comments about the coronavirus pandemic’s long-term impact.
While big tech has shouldered the load, the Nasdaq Composite is also home to 700 health-care and biotechnology companies that have stoked investor interest as they search for ways to treat the coronavirus. Three of the top five performers in 2020 are biotech firms, and all of them are up more than 400%, including Genprex Inc. and Vaxart Inc.
The S&P 500 and Dow Jones Industrial Average, which track broader swaths of the economy, both remain lower for the year by at least 10%. But they, too are well off their March lows even as investors contemplate mass layoffs and one of the largest economic contractions in history. Investors are focusing on news of coronavirus curve flattening and economic reopenings. Unprecedented monetary and fiscal policies have also buoyed sentiment.
The furious seven-week rally has given way to hand-wringing over surging valuations that appear unjustified in an economy that contracted by 4.8% last quarter and looks set to shrink by more in the current period.
Companies in the S&P 500 now trade at about 20 times expected earnings over the next year, higher than at the market peak in February. The Nasdaq Composite is even more expensive, trading at almost 28 times forecast profits in the next 12 months — the highest in 15 years.
“I don’t think any full sector is bullet-proof to this,” Dunkin Allison, director of portfolio management at Delegate Advisors, said by phone. But “technology is in a position, given the nature of their business models, to be more defensive, experience less pain and also come out of this a fair amount stronger than they were, say, six or 12 months ago.”
The tech dominance has been so strong that it has drawn some warnings about breadth — or what share of the market’s components are doing well. One particular measure that compares performance of the median S&P 500 constituent with the broader benchmark shows breadth is at one of the narrowest levels of the past 40 years, according to Goldman Sachs. Bank of America analysts late last month pointed out that participation in the rally has been weaker than the rebound off the late-2018 lows.
“Eventually, narrow market breadth is always resolved the same way,” Goldman strategists including David Kostin wrote in a May 1 note to clients. “Often, narrow rallies lead to large drawdowns as the handful of market leaders ultimately fail to generate enough earnings strength to justify elevated valuations and investor crowding.”