The Impressive Rise of the Technology Stock Market: Is it Sustainable?

To a large extent, the “NASDAQ Composite” stock exchange index representing this sector on Wall Street has grown by about 20% since the end of last year, which can be considered a very rapid rise even in good times for the economy and with a much more pleasant market situation for investors. The segment of technological shares has always seemed tempting among investors and gained more attention in recent years with the arrival of Covid-19, which created the need for additional various remote communication solutions, e-commerce, etc. At the same time, as people spend a lot of time at home, and many of them incomes did not fall, but as expenses decreased, additional funds arose to fill the long hours of sitting at home, and investments in the shares of various companies in the technological sector created an opportunity not only to fill time, but also to earn very well.

Back in the spotlight

Now this segment has come back into the limelight, although it cannot be said that we have entered a new era this year, which opens fundamentally new and extensive profit opportunities in the technological sector as a whole. It is a fact that technologies are constantly developing and new opportunities are emerging for certain companies, however, there is hardly any reason to talk about the fact that the sector is currently in a fundamental “fat period” or that fundamentally new opportunities for growth have opened up in the context of the future, as it was at the end of the nineties of the last century, or 2020-2021 in connection with the coronavirus.

Despite this, the rise since the beginning of the year has been impressive. For example, the share price of the network company “Meta” (“Facebook”) has doubled this year and exceeded 249 US dollars per share at the close of the stock exchange on May 24. Seeing such a rapid rise, the number of people who want to earn money is constantly growing. But before buying these stocks for a quick profit, you should ask yourself how justified and whether such a dizzying rise in stock prices, as it has been recently, can be sustained. It is also important to consider whether the company’s profit potential is able to follow such a rapid price increase, or whether this price increase lasts as long as the buyers themselves maintain it, thinking that they will be able to sell the bought shares to someone even more expensive.

For now, the good news is that in the case of Meta, there is talk of an improvement in earnings forecasts. If we look at the financial portal “Yahoo! “Finance” company’s profile of the analysts’ forecasts about changes in profit, then you can really see quite significant increases in the expected profit. For example, a compilation of earnings estimates dating back a week shows that earnings per share for the company could reach $2.90 this quarter. For comparison, a month ago it was 2.41 dollars, and three months ago it was 2.34 dollars per security.

The company’s profit for this and next year is also growing rapidly. Regarding this year, three months ago it was predicted on average 9.53 dollars per share, and a week ago – 11.70 dollars per share.

It should be noted that “Meta” is far from the only popular giant of the Internet segment that has experienced an impressive increase in the share price. For example, the share price of the Internet retailer “Amazon.com” has increased by 40% in the reporting period since the end of last year. The general dynamics of both the market and the forecasts seem tempting to open the wallets, but at the same time it would be worth following how much the profit forecasts increase in certain periods of time and how much the stock price rises during the same period. It may happen that the profit potential in shares is already priced in and the rise itself continues only after the previous inertia, and in fact buying shares is associated with high investment risks.

At the same time, the current trends confirm to a large extent that the big bursts of inflation in the world have not made everyone poorer, moreover, inflation itself encourages people to look for opportunities to earn money, so that the money set aside for savings does not lose its purchasing power during the rapid increase in consumer prices. Investors, including Latvian investors, using the services of local banks and investment companies, have the opportunity not only to buy shares of specific companies or to play on the fall of these securities, but in the same way to operate on whole groups of companies, including the already mentioned “NASDAQ Composite” index. This happens by purchasing specialized exchange-traded funds, the value of which changes depending on the dynamics of a specific stock market index. This opens up the opportunity for investors to both reduce the risks associated with the purchase of shares of a particular company, and also to open investment exposure to a wide spectrum of company shares with a few hundred euros.

Recovers what was previously lost

According to experts, there are several reasons why the share segment of the technological sector has risen so rapidly this year. The head of “INVL Pensiju Fondi” Andrejs Martinov points to last year’s rapid fall in the value of the “NASDAQ Composite”, as a result of which it may seem that the shares were unjustifiably “oversold”. The main reasons for such a drop were investors’ concerns that high interest rates will cause an economic recession, and it is the shares of the technological sector that will suffer the most from this situation, a financial expert explains what happened earlier.

Atis Krūmiņš, head of Luminor’s Asset Management and Pensions Department in the Baltics, adds that since October and November of last year, when technology companies reached the lowest point of the last year, the current rise is largely related to massive optimization of company operations. “The increase is mainly explained by the announced decisions on resource optimization, such as reducing the number of employees, or reducing the expenses of non-priority projects, such as cutting investments in the “Meta” virtual reality project “Metaverse”. In addition to this, products related to the topic of artificial intelligence have given a new spark to the market’s perception of future growth potential. In addition, what is no less important – the financial results of the companies have remained stable and therefore supportive of the price increase,” the representative of “Luminor” comments on the situation.

Adaptation and risks

Commenting on the economic and financial developments, A. Martinov draws attention to the fact that companies in the technological sector were able to partially adapt to new challenges and potential threats, that is, they reduced expenses, reduced the number of employees, revised their growth plans and “returned to reality”. “This coincided with a decline in share prices, and looking at the new lows, shares have become attractive again. Also, in general, the stock market looks stronger than last year, there is still no recession, inflation continues to rule the world, despite high rates, and in such conditions, stocks look more attractive than bonds,” says A. Martinov.

In terms of investment risks, he believes that share prices in the technology sector may decline if the global economy does have to live with a recession, problems in the banking sector continue, cross-border restrictions flourish and become more pronounced, and mutual sanctions affecting the IT sector again. will cause a shortage of IT components and chips. “It is hoped that the economic wars between China and the USA will not flare up and the technological sector will be a “port of peace” for investors throughout the year,” thinks the INVL investment expert.

According to A. Krūmiņas, when thinking about risks, one must definitely mention the “chip war”, which is slowly gaining momentum. The expert knows to say that until now the US had taken several steps to strengthen domestic chip production – not only in terms of intellectual property, but also in terms of physical production. In the view of A. Krūmins, the currently observed direction of relations between China and the US in this regard is definitely worrying for technology companies in general, which is confirmed by the restrictions introduced by China in relation to the chips produced by “Micron”, as well as recent warnings by the head of NVIDIA to the US government to be very careful regarding new restrictions.