The economic and social consequences of the pandemic appear to have accelerated the rise of dominant technology platforms in retail, social media, streaming content, and remote conferencing. This trend is likely to widen the divide between industries and companies benefiting from disruption and those challenged by it.
T. Rowe Price analysts are carefully assessing companies to identify the ones they believe have the balance‑sheet strength to get to the other side of the pandemic and how that could impact recoveries in equity and credit markets.
“The changes over the past few months in the ways we work, socialize, and entertain ourselves have advanced the fundamentals of the big tech platform companies by several years,” Sharps says.
Through the first five months of 2020, Sharp notes, technology was the strongest performing sector in the S&P 500 Index while energy—hurt by collapsing demand and a price war between Russia and Saudi Arabia—was the worst performing.
The largest of the mega‑cap technology giants appear well‑positioned to benefit from accelerating disruption, according to Sharps.
- Collectively, the the five largest U.S. technology firms by market capitalization—Microsoft, Apple, Amazon, Facebook, and Google—have more than USD 500 billion in cash reserves, potentially enabling them to acquire startups or younger companies that are having difficulty obtaining financing in a distressed environment.
- We believe the major technology platforms not only have the ability to continue to grow earnings and cash flow in a challenging economic environment, but also have opportunities to gain market share from weaker competitors, such as bricks‑and‑mortar retailers.
- The tech giants can attract the best software developers, engineers, and business people, Sharps argues.
Technology Weathers the Storm While Energy Struggles
(Fig. 2) Cumulative Returns on the S&P 500 Technology and Energy Sector
Past performance is not a reliable indicator of future performance.
December 31, 2019, through May 31, 2020.
Sources: T. Rowe Price calculations using data from FactSet Research Systems Inc. All rights reserved. J.P. Morgan Chase & Co., Bloomberg Finance L.P., and Standard & Poor’s (see Additional Disclosures).
Market Leadership Remains Narrow
Going forward, Sharps suggests, disruption and the pandemic both should continue to favor the top five U.S. technology platforms, which, as of early June, already accounted for more than 20% of market capitalization in the S&P 500 Index—greater than the bottom 340 index constituents combined.
Meanwhile, a number of sectors with heavy weights in the value universe—such as energy, transportation, and financials—have been deeply damaged by the crisis. “Large parts of the market still haven’t recovered yet,” Thomson says.
While better‑than‑expected economic news prompted a shift back toward some challenged sectors—growth to value, large‑cap to small‑cap, and U.S. to non‑U.S. equities—in early June, a more sustained reversion trade will require an uptick in inflation and a weaker U.S. dollar, Thomson argues.
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Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. Investing in technology stocks entails specific risks, including the potential for wide variations in performance and usually wide price swings, up and down. Technology companies can be affected by, among other things, intense competition, government regulation, earnings disappointments, dependency on patent protection and rapid obsolescence of products and services due to technological innovations or changing consumer preferences. Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. Investments in high-yield bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets. All charts and tables are shown for illustrative purposes only.
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