Technology stocks have once again captured the attention of investors, regardless of their valuations, as there is a rotation into these companies' shares. A month ago, the shares of the fastest-growing technology companies fell amid fears that high inflation readings would drive interest rates up. While consumer prices have already surged, interest rates have decreased, as investors bet that rising inflation will be short-lived, prompting investors to return to expensive yet promising stocks, like those of software manufacturers. The basket of software stocks at "Goldman Sachs," which is trading at least 8 times its price, reached a three-month high after a 27% increase since May 13, with giants like "Facebook," "Alphabet," and "Microsoft" hitting record levels during the same period. The current resilience confirms prevailing sentiment among long-term fund managers that the growth prospects for technology stocks remain bright as the reopening of the U.S. economy continues to gain strength. Saera Malik, Chief Investment Officer for Global Equities at “Nuveen,” which manages assets worth $1.2 trillion, noted that these companies "have strong business models, and after emerging from the pandemic's impact, they have become stronger, thus demanding a premium."
### Interest Rate Hike
The Federal Reserve's recent acknowledgment of the risks posed by inflation and its indication of willingness to raise interest rates earlier than expected has done little to dampen investor enthusiasm. The Nasdaq 100 index soared to a record high the day after the Federal Reserve's meeting last Thursday, rising by 1.3%, despite relinquishing some of those gains on Friday. Some stocks with the highest valuations saw even greater rises over the past month. For example, "Cloudflare Inc," a company providing website security services, is trading at 51 times its expected 2021 sales, and "DocuSign Inc," an electronic signature company, is priced at 26 times its estimated sales. Shares of both companies have risen over 50% since mid-May. The prevailing belief on Wall Street is that the steep rise in inflation will be short-lived. A recent survey by the "Bank of America" of fund managers revealed that nearly three-quarters do not expect high inflation to persist for long. This belief alleviates concerns that rising interest rates will dampen demand for technology stocks, which have generated considerable optimism about future growth. Kim Forrest, Chief Investment Officer at "Bokeh Capital Partners," stated that "it is clear we are in a timeframe where employees are being paid higher wages, but I don't think that will spiral out of control." Forrest has not altered her portfolio composition due to inflation and favors semiconductor makers like "Micron Technology Inc" and "Xilinx Inc," which were acquired by "Advanced Micro Devices Inc" in an all-stock deal.
### Software Stocks
Old technology companies that pay dividends and have performed well this year amid a rotation toward value stocks have recently lost some luster. "Oracle," a database software company boasting a 1.7% dividend yield, recently saw its stock drop after a disappointing earnings report. The company's shares are now down 10% from the record high reached on June 8. Broader, the "Russell 1000" index has shed nearly 5% in two weeks, while companies like "HP Inc" continue to benefit from strong demand for personal computers. Nevertheless, in the long term, the growth in many of these more mature companies looks promising, according to Daniel Morgan, Senior Portfolio Manager at “Synovus Trust Co,” who said he is accumulating positions in companies like "Adobe Inc," which is preparing for faster expansion and higher profits in the long run.
### Ongoing Risks
Of course, not everyone is comfortable with inflation. Jamie Dimon, CEO of "JPMorgan," stated that he is preparing for more inflation and rising interest rates. Hedge fund manager Paul Tudor Jones told CNBC that if he were a member of an investment committee for a pension fund, he would have "as many inflation hedges as possible." Despite the recent gains in the fastest-growing stocks, many technology stocks remain cheaper than they were earlier in 2021, thanks to improved earnings. The average price-to-earnings ratio is 37 in the Nasdaq 100, down from a peak above 40 in February. According to Malik, Chief Investment Officer for Global Equities at “Nuveen,” "there are still deals to be found in high-valuation stocks," and she expects profit growth to continue supporting gains, favoring software manufacturing stocks like "Salesforce.com" and "HubSpot Inc." She stated, "Software companies continue to benefit tremendously from the reopening of economies as businesses seek ways to spur economic growth. We will not rely solely on software."
