For years, US technology stocks have beaten the rest of the market. And not by much. This trend was reinforced by the Covid crisis, which pushed the valuation of growth stocks to unprecedented heights - even higher than during the ‘dot.com’ bubble.
This sky-high valuation was sustainable as long as the earnings growth of these US growth stocks remained superior. But at least in the short term, this seems to be coming to an end. And that is not just because of the disappointing figures from Amazon.
This year, the realised earnings growth of US technology companies is below that of the rest of the market. This is certainly partly due to the strong profit growth of oil and commodity companies. But that does not change the fact that the earnings growth of tech companies is almost always above the market average.
The chart below also points to the waning earnings superiority of US tech companies. The profits of all Nasdaq companies expressed as the percentage of the profits of all S&P 500 Index companies are declining rapidly.
Connecting the dots
The expected earnings growth of the US stock market is currently at 10 percent, exactly the same as the expected earnings growth of stocks worldwide. And this, too, is rare. Investors almost always expect more earnings growth from America.
Yet American shares are still much more expensive than shares in other parts of the world. But now that earnings superiority seems to have disappeared for the time being, the question arises as to what extent this is still justifiable. Because of long-term trends such as the internet of things, AI, big data, cybersecurity and the green revolution, one might assume so.
But to avoid becoming Cathie Wood, I would argue that sharply higher interest rates and less impressive earnings growth make the outlook a little less exuberant.
Jeroen Blokland is founder of True Insights, a platform that provides independent research to build diversified multi-asset portfolios. Blokland was most recently head of multi-assets at Robeco. His “chart of the week” appears every Monday on Investment Officer.