Tech companies have delivered strong third-quarter earnings, posting the biggest beats against consensus expectations of all sectors. This was particularly important given tech’s market-leading earnings growth had faltered somewhat in 2019 as several large companies were facing cyclical slowdowns.
Apple helped to set the tone last week, as the Cupertino giant generated record operating cashflow and record earnings per share for the quarter. Tech enthusiasts were also able to point to the potential for 5G iPhones coming on stream later in the fiscal year to provide a further fillip to Apple, while the company launched its long-awaited new TV service on 1 November too.
Politics helped the tech sector as well. China and Asia may not be big revenue generators for most tech companies, but the sector’s supply chains depend much more on the region than the average sector. The softening tone in the trade war therefore clearly helped technology companies.
Closer to home, the shifting sands in the 2020 US election also went in tech’s favour. We expect tightening regulation as our base line, but Elizabeth Warren’s rhetoric has been at the more aggressive end of the US political spectrum. So as the bookies’ odds of a Warren presidency have faded somewhat, big tech firms in the regulation spotlight saw some relief.
Also on the regulatory front, we’ll be paying close attention to how companies’ responses to political influence evolve ahead of the next US election. Facebook took a lot of criticism for permitting lies in political ads, which was followed by Twitter receiving applause for banning political ads. The encouraging thing is that the industry is responding to growing pressure, which in turn increases the probability of a future regulatory framework that works for both consumers and companies.
The big Apple
Moreover, regulation risk highlights an important issue not just for our tech position, but for all investors. Apple is now the world’s largest public corporation, with a market cap of $1.1 trillion. Accounting for 2.4% of the MSCI All Countries World index, Apple’s weight in traditionally weighted global-equity benchmarks is equivalent to that of all German stocks combined. No other business’s results have the same impact on sentiment towards global equity markets.
On a strategic basis, this level of concentration in market-cap weighted equity indices is something that makes us pretty nervous. Justin has discussed this concentration conundrum at length before, focusing on the handful of stocks driving the US market.
Framed differently, global market-cap weighted indices come with an unhealthy exposure to anything that affects the entire US corporate sector. We obviously don’t yet know who will win the Democrat nomination for the US presidential election next year, but pitting a tax-cutting deregulating incumbent against a radical left-wing firebrand would be a good example of the kind of idiosyncratic risk we worry about.
Overall, however, with the election still a year away, healthy bottom-line growth, attractive late-cycle characteristics and few signs of the techphoria that marked previous market peaks, I still think the case for tech is pretty compelling.