According to portfolio manager Freddie Lait, the market’s current favoritism towards Big Tech stocks is myopic, and he believes that the next phase of the bull market will encompass other sectors that offer better value.
In 2023, the stocks of major American tech companies have been performing exceptionally well. Year-to-date, Apple has seen a 33% increase, Alphabet (Google’s parent company) has risen by 37%, Amazon has surged by 37.5%, Microsoft is up by 31%, and Meta (formerly known as Facebook) has experienced a staggering 101% growth since the beginning of the year.
This select group of companies has diverged significantly from the broader market, as evidenced by the Dow Jones Industrial Average, which has only seen a marginal increase of less than 1% this year.
The gap between Big Tech and the overall market has widened further after the earnings season. Approximately 75% of tech firms surpassed expectations, while other sectors exhibited a mixed performance and generally pessimistic economic data.
Investors are also banking on future market rallies as central banks gradually reduce and eventually reverse the aggressive monetary policy tightening that has characterized recent times. Big Tech has outperformed during the era of low interest rates and received a significant boost from the Covid-19 pandemic.
However, Lait, who is the managing partner at Latitude Investment Management, stated in an interview with CNBC’s “Street Signs Europe” that although the market’s current positioning is understandable given the circumstances, it is also short-sighted.
Lait believes that we are entering a different market cycle for the next two to five years. While there may be challenges this year, and people may seek refuge in Big Tech as interest rates decline, Lait anticipates that the next phase of the bull market will be more inclusive than the previous one, which was primarily driven by the tech and healthcare sectors.
He emphasizes the need to analyze stocks in sectors similar to those represented in the Dow Jones Industrial Average, such as industrials or “old economy” stocks, in order to identify deep value that can complement high-growth businesses in other sectors.
Lait predicts that as market participants discover value in sectors beyond tech over the next six to twelve months, the valuation gap between tech and the rest of the market will begin to narrow.
Nevertheless, considering the strong earnings demonstrated by Silicon Valley in the first quarter, Lait suggests holding some tech stocks as part of a diversified portfolio.
“We own some of those technology shares as well, but I think a portfolio exclusively exposed to them does run a concentration of risk,” he explained.
He further notes that relying solely on tech stocks would overlook numerous opportunities present in the broader market, including businesses with similar growth rates but trading at much lower valuations. By diversifying, investors can gain more exposure and potentially benefit from a different market cycle.
Lait advises investors not to dismiss tech shares entirely, but to carefully consider the expanding scope of the rally and the narrowing gap in valuations, and to seize appropriate moments to invest in the market.