Welcome Big Tech Back to the Head of the Class

Big Tech is the comeback kid of the moment, after its long-running rise sputtered during the first quarter and those old stalwarts, cyclicals, ascended in the re-opening trade. The tech titans have caught up, and are going to really cook from now on, as they reassert their leadership of the market, says Barclays.

The pandemic recovery trade has run its course, and now it’s time to get back into Big Tech stocks, according to the bank’s top US analyst.

“We believe market leadership is likely to change from cyclical to secular growth stocks as the COVID recovery trade has mostly run its course,” Maneesh Deshpande, head of US equity research at Barclays Capital, said in a note. “Secular growth stocks look favorably positioned to benefit from the digital transformation that got accelerated during COVID.”

Last year, the tech big guys romped, as the Nasdaq 100 shot ahead 47.6% while the broad S&P 500 increased 16.2%. As of Wednesday’s close, the S&P was up 14.4%, with the Nasdaq index not far behind, at 12.9%, a big improvement since March.

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Value and cyclical stocks have had a nice 2021. But a number of Wall Street analysts, including Deshpande, think their pandemic bounce back has already been priced into those recovery names.

“Following positive news on the vaccine front in November 2020, as the path to a cyclical economic recovery in 2021 became clearer, there was a rotation that began away from stocks with positive exposure to COVID-19 and into stocks with negative exposure to it,” Deshpande wrote. “We think this rotation is now complete.”

Tech names, particularly the largest ones, are well-positioned for the rest of the year owing to the speed-up of digital transformation during the pandemic, Barclays argued. The whole panoply of tech advances, in this view, has embedded itself into Americans’ daily lives and demand for them will only grow. That includes e-commerce, digital advertising, work-from-home systems, and cloud infrastructure, the bank said.

The Barclays report zeroed in on FANMAG stocks—those mega-cap monsters that last year so dominated the field. Facebook, Amazon, Netflix, Microsoft, Apple, and Google-parent Alphabet are enormous competitors. Plus, the bank said, they enjoy the advantages of being relatively cheap, at least compared to 2020.

“We prefer FANMAGs as their valuations have declined to 2019 levels,” Deshpande said, referring to before they really took off in 2020.

Of these, the best prospects lie with Alphabet, Amazon, and Microsoft, he said. “We expect these stocks to hold on to their COVID market share gains and continue to benefit from the acceleration of digital transformation,” Deshpande wrote.

His reasoning: Google will benefit from rising digital ad revenue as the economy improves. Amazon’s solid position in e-commerce and cloud computing services will continue to build its lead. Microsoft will benefit from people who continue to work from home and also those who go back to the office. Thanks to its software and cloud business, it has benefited from the work-from-home shift during the pandemic and also could see a lift as workers return to offices.

Netflix and Apple are the exceptions to this rebound tale thus far, as both are flat for the year. Netflix has posted slower than expected subscriber gains, amid strong challenges from the likes of Disney Plus and HBO Max. Apple’s centerpiece iPhone has seen sales lag, as consumers wait for an upgrade tied to 5G.

Of course, should inflation keep rising, it wouldn’t be good news for the tech hotshots. Higher rates mean lower earnings in the years ahead for them.