Fund Managers Renew Love for Tech Shares as Curiosity Charges Ease

So much for that rotation into value. Technology stocks are back on investors’ shopping lists once again, regardless of their valuations.

Just a month ago, the shares of faster-growing tech companies were being pummeled amid fears that hot inflation readings would push interest rates higher. While consumer prices did indeed jump, interest rates actually have fallen as investors bet that the inflation surge will be short lived. That’s made expensive but promising companies like software makers attractive again.

A Goldman Sachs basket of software stocks that trade for at least eight times sales is at the highest in three months after a rally of 27% since May 13. Megacap favorites like Facebook Inc., Alphabet Inc. and Microsoft Corp. are back near records after gains over the same span.

The resilience underscores the conviction among fund managers with long-term time horizons that the prospects for tech’s growth stocks remain bright as the re-opening of the U.S. economy continues to gain steam.

These companies “have strong business models and the tailwind of megatrends from the pandemic that have only gotten stronger,” said Saira Malik, chief investment officer for global equities at Nuveen, which has $1.2 trillion in assets under management. “That’s why they demand a premium.”

High valuation stocks have rallied despite elevated 10-year Treasury yields

The Fed’s acknowledgment this week of risks posed by inflation and the signal that it’s prepared to raise rates earlier than expected did little to dampen enthusiasm. The Nasdaq 100 Index rose to a record the day after the Fed meeting with an advance of 1.3%, though it gave back some of those gains on Friday.

Some of the stocks with the highest valuations have rallied the most over the past month. For example, infrastructure software company Cloudflare Inc., which trades at 51 times projected 2021 sales, and DocuSign Inc., the electronic signature company priced at 26 times estimated sales, are both up more than 50% since the middle of May.

The prevailing belief on Wall Street continues to be that the spike in inflation will be brief. A recent Bank of America survey of fund managers found that nearly three-quarters don’t expect elevated inflation to be long lasting. That is alleviating concern that rising interest rates would kill demand for tech stocks that have priced in a lot of optimism about growth in the distant future.

“We’re clearly in a time frame where human beings are getting paid more but I don’t believe that’s going to spiral upwards out of control,” said Kim Forrest, chief investment officer at Bokeh Capital Partners.

Forrest isn’t changing the makeup of her portfolio due to inflation and likes semiconductor makers like Micron Technology Inc. and Xilinx Inc., which is being bought by Advanced Micro Devices Inc in an all-stock deal.

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