Where investing strategists see opportunities in the present market.

By CALEB SILVER
U.S. markets have started off August with strong gains behind the strength of the big technology stocks that have powered the market higher all year. Most
reported solid earnings last week, with Amazon and Apple continuing to pile on sales despite the pandemic. Investors may be questioning how much growth they still have in front of them. The July jobs report, released last Friday, shows a nation beset by more than 10% unemployment in what was supposed to be a recovery period for the U.S. economy. But a resurgence in the virus in June and July, and continued lockdown measures in some states is bound to extend the recession for several months. The fact that equity markets continue to gain may be confusing to some, but that’s actually not an anomaly, if you look at history.

This week, we are again featuring Katie Koch, from Goldman Sachs Asset Management, and Ryan Detrick, LPL Financial Senior Market Strategist, with their perspectives.

While we are sharing strategists’ recommendations, every investor needs to make their own decisions based on their risk tolerance and personal situation. The comments herein are for your perspective, but should not be taken as investing advice.

Katie Koch, Co-Head of Fundamental Equity, Goldman Sachs Asset
Management
“Last week was a big one for Big Tech. We’ve had earnings results, Congressional hearings, and continued strong share price performance. The so-called FAAMGs – Facebook, Apple, Amazon, Microsoft, and Google’s parent company, Alphabet – each reported their second quarter earnings, beating consensus expectations and pushing earnings estimates for the full year even higher. From a fundamental perspective, we continue to like many of the FAAMGs. They continue to drive innovation and we view them as great businesses with solid fundamentals and strong balance sheets. We think valuations may look stretched for a few, but believe others present a compelling investment opportunity.

Clouds Gather for FAAMGs

However, we believe there may be some clouds forming on the horizon which investors should be aware of. First, after a decade at the forefront of technological innovation, and having enjoyed incredible share price performance as a result, these five stocks now represent 22% of the S&P 500, the highest concentration in the index’s five largest stocks in more than four decades. The tech ecosystem is, by its very nature, innovative and dynamic, and there has been continuous turnover in the leading tech names over time. Ten years ago, Cisco, Intel, IBM and Oracle were among the largest tech names. Market leaders have historically not been able to maintain their leadership positions for more than five or six years, so after ten years of FAAMG dominance, the next ten years could look very different. Second, as we were reminded this week when four of the big tech CEOs appeared before Congress, the threat of increased regulation on Big Tech has not gone away. Uncertainty is never good for corporate decision-making, slowing the pace of innovation, and this heightened focus on the market power exerted by the Big Tech names also impairs their ability to grow through acquisitions, making them more reliant on organic growth.

Finally, we believe that several of these companies’ end markets are approaching saturation. With more than half of global advertising now online and nearly 4 billion people around the world owning a smartphone, these companies may struggle to continue to produce the growth rates that investors have become accustomed to. Smaller Cap Tech Stocks May Have More Growth Today, we see a wealth of opportunity in tech companies, but believe investors will be rewarded by expanding their horizons and looking beyond the US and to smaller cap companies. With ubiquitous internet and growth of the public cloud, we see opportunities in companies that are applying proven business models to high growth markets, resulting in the emergence of local “tech titans”, and in smaller companies that have developed innovative and differentiated technology that enables them to compete with the incumbents. We believe these companies – which we call “future tech leaders” – may well become tomorrow’s Big Tech.”

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