Technology companies have done spectacular this year. The NASDAQ set an all-time intraday high of 12,074 on September 2, 2020. The index has come under pressure ever since. Yesterday's close at 10,807 represents a 11% correction. Recently talking heads compared today’s market to the 2000’s market crash. While I do feel tech values are relatively high, I don’t feel we are in the same scenario. The companies in the index are showing that they can increase earnings, even in a pandemic environment. According to JPMorgan's Weekly Market Recap, despite the COVID pandemic, technology companies increased their earnings by .5% in 2Q20 compared to 2Q19, while the remaining companies in the S&P 500 earnings contracted by 27%. In contrast, in 2001 tech companies saw a sharp decline in their earnings.
In addition to maintaining positive earnings, the top 5 technology companies are sitting on ~$550 billion in cash*. It doesn’t end here as these companies can increase the cash pile. Per the graph below, technology companies’ free cash flow has increased from 5% in 1995 to 23% in 2020.
We need to understand that the world is turning more to technology. The pandemic has increased the adoption of technology, but there is still a long way to go. The stock price of these companies may have gotten ahead of themselves, but any pullback could be a buying opportunity. I don’t believe the world is going to slow the adoption of technology.
EFT of the Week
The iShares EAFE (EFA) invest in developed international markets, not including the U.S. and Canada. It invests in Europe, Australia, Asia, and Far East. International developed markets haven’t seen their markets recover as the U.S. markets have. This is partially due to the U.S. having a large percentage of the world’s technology-related companies. China also has a fair amount of tech companies; however, China is still considered a developing market, so it is not part of the fund.