While technology hasn’t brought us the flying cars or cloned dinosaurs we thought we might find in the 21st century, it still surged ahead by leaps and bounds in recent decades. That should provide some comfort to investors bemoaning the market’s recent rough patch, DataTrek Research says.
This year’s stock market rally has stumbled in the historically tricky month of August and so far in September. The
Dow Jones Industrial Average,
S&P 500,
and the
Nasdaq Composite
are all in the red this month, and none have hit a new 52-week high since the Dow’s on August 1.
Chief to blame is interest rates’ rapid climb that kicked off in 2022, after years of hovering at ultralow levels. With rates likely to remain elevated, some investors worry about they could continue to drag on stocks. But DataTrek Research Co-Founder Nicholas
Colas
reminds investors to look beyond interest rates and Federal Reserve policy.
“Tech stock valuations may rise and fall with interest rates, but innovation doesn’t care about the yield curve,” Colas wrote Tuesday. “As markets struggle to adapt to higher rates in 2023, it is useful to remember that it is disruptive innovation which drives long-run stock market returns. Not the yield curve.”
The tech-heavy Nasdaq has had the biggest decline of the three major indexes in September. Colas, however, notes that the 1970s—another time of higher rates and inflation—was a golden age for technological advances, with the introduction of the HP-35 calculator and the
Apple
II personal computer, even as ultrasafe Treasuries sported yields even higher than today’s. From its 1971 launch through the end of that decade, the Nasdaq not only rose nearly 50%, but outperformed the S&P 500.
When it comes to longer-term market gains, 10-year Treasury yields have nothing on a decade governed by Moore’s Law, which states computing power per dollar doubles every few years, Colas says.
Framed that way, it’s easier to understand why the so-called Magnificent Seven big tech firms—Apple (ticker: AAPL), Amazon.com (AMZN), Google parent Alphabet (GOOGL), Facebook parent Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA)—have surged. Enthusiasm about the transformative power of artificial intelligence and machine learning across industries has fueled investor interest.
Put another way, we’ve come a long way from pocket calculators since the 1970s, and several decades from now our current technology will look quaint. Investors’ worries about the latest stock market stumble might look quaint in a few years, too.
“While interest rates and other macro considerations are certainly important, human innovation is the more powerful force in driving long-run equity returns,” Colas concludes. “And, thankfully, entrepreneurs and technologists don’t care too much where 10-year Treasuries trade as they build the next batch of novel and disruptive businesses.”
Nor is he alone in arguing that Big Tech isn’t done rallying yet, as technical patterns, like upward earnings revisions, are bullish signals for the industry.
“[T]echnological disruption across industries is creating opportunities for investors to add longer-term portfolio growth potential,” writes Solita Marcelli, chief investment officer Americas, UBS Global Wealth Management in a note Tuesday. “In the technology sector, we focus on disruptors in the software, internet, and infrastructure fields, as the impact of artificial intelligence broadens beyond enablers and platforms to also include software and solution providers.”
Technology’s ability to continue transforming our lives and driving stock market returns almost makes up for the lack of airborne automobiles and un-extinct dinosaurs. Almost.
Write to Teresa Rivas at teresa.rivas@barrons.com
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