Tech rally unveiled retail investors’ long term affinity
In this week’s video insight, Roger delves deeper into the tech rally and sheds light on the recent survey conducted by eToro, indicating retail investors’ continued favoritism towards the tech sector for the rest of the year. As earnings season unfolds, Roger analyses the justification behind the high prices of major tech companies like Microsoft, Alphabet, and Meta, emphasising their substantial investments in AI and cloud business revenues. However, the question remains: are the revenue gains from AI truly transformative or merely incremental?
Transcript:
Hi, I’m Roger Montgomery and welcome to this video insight.
Back in November last year, I wrote this blog, entitled “if history is our guide, then now is a great time to invest”. I revealed a convincing pattern through history of good years in terms of stock market returns almost always following very bad years. And last year was indeed a very bad one. I showed that the S&P500’s worst years in the last 150 were 1931, 1937 and 2008. Curiously they were followed by the years 2009, 1938 and 1933 with the market rising between 20 to more than 50 per cent.
Let me quote from that November 22 blog “given where price to earnings (P/E) ratios are today, there is a genuine possibility investors who purchase shares in high-quality growth companies will not only benefit from the earnings growth produced by their selections but also the re-rating, at some point in the future, to higher P/E ratios.”
And I concluded that blog by saying “Eventually, indiscriminate selling gives way to discernment. Quality wins out and history shows good returns years follow years of poor returns. Standing on the sidelines may be a regrettable and costly error.”
Now that was November 4 and since then the S&P 500 has risen 21 per cent and the Nasdaq has had its best six months start to a year since 1983. In fact, the NASDAQ100 is up 43 per cent since that blog was written.
Of course, with each rise and decline, there is a reason and this time the reason is technology and the intriguing demand for technology stocks by U.S. retail investors.
Despite the recent rally in tech that has driven the major indices higher, a recent survey conducted by investment platform eToro revealed that tech will likely remain a favored sector for retail investors for the rest of the year. The survey of 1000 clients revealed 23 per cent of individual investors reported that they will “most likely” ramp up their investments in tech during the latter half of this year.
Now with earnings season upon us, the high prices of major technology companies will require some justification.
Microsoft, Alphabet, and Meta have demonstrated healthy spending on artificial intelligence (AI) as well as a rise in their cloud business revenues. Microsoft’s announcement earlier this year of its $10 billion multi-year investment in OpenAI led to a 44 per cent rise in its shares. Meta’s stock has risen by an astounding 133 per cent year-to-date, with Apple and Amazon up 54 per cent and 50 per cent respectively. Alphabet has seen a 36 per cent rise.
But as I pointed out in a more recent blog, the jury is out on whether the revenues earned from AI are transformational or just incremental, and the answer to that question will determine whether the euphoria gives way to more discerning questions about the fiscal implications of AI development?
The benefits of generative AI to business are indeed enormous so it’s reasonable to assume companies will pay more for enterprise software that incorporates the technology. SAP for example suggests that by merging generative AI with the types of information SAP’s system stores, clients will uncover ways to reduce inventory, boost sales and even improve carbon emissions.
Already, the German retailer Schwarz Group, which owns Lidl and Kaufland stores, is using everything from its historical business data to consumer sentiment, inflation data and weather forecasts — in conjunction with generative AI — to predict demand. According to SAP’s CEO, the result for Schwarz has been 15 per cent better inventory management, a 20 per cent decrease in waste and an uptick in total sales due to having the right products on the right shelves at the right time.
As an example of the potential revenue impact for providers of access to the benefits of AI, SAP plans to charge 30 per cent more, on average, to customers who use its AI features.
Consequently, it sees AI doubling the size of its addressable market, to reach $1 trillion by 2028.
So, it’s clear that AI’s influence on the market is far from over but investors patience over.
coming months will determine whether this tech rally is a bubble or a well-founded confidence in the sector’s potential. And it’s worth remembering that investors tend to overestimate the short term and underestimate the long term.
That’s all we have time for today I look forward to speaking to you again next week and in the meantime, please continue to follow us on Facebook and Twitter.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
