MENU

Volatility in technology highlights importance of selectivity

Alan Tu, Portfolio Manager,
Global Technology Equity Strategy

We believe the sector’s long-term growth stories remain strong.

Key insights

  • The recent pullback in technology stocks appears to be due to profit taking after a strong run pushed up valuations.
  • We believe that long-term, secular growth trends creating value in the technology sector remain intact and have accelerated during the pandemic. 
  • The potential for further volatility could favor stock pickers with deep knowledge of individual tech companies and business models.

The recent pullback in technology stocks strikes us as a normal bout of profit taking after the sector’s strong run. Although the broad-based sell-off can be unsettling for investors, we believe that the powerful secular trends underpinning the technology sector’s most appealing long-term growth stories remain intact. The digitalization of the economy has shown signs of accelerating, from growing adoption of e-commerce, online advertising, streaming media, and cloud-based software to the proliferation of semiconductors in the automotive and other industrial end markets.

The digitalization of the economy has shown signs of accelerating…

Strong Performance Invites Profit Taking

Over the eight months ended August 31, 2020, information technology (IT) had outperformed the S&P 500 and the index’s 10 other sectors by a meaningful margin. The companies with the five largest weightings in the S&P 500 at the end of August—Apple, Microsoft, Amazon.com, Facebook, and Alphabet (Google’s parent company)—also fared well, accounting for more than 800 basis points of the index’s return over this period.

For many tech stocks with well-understood growth stories, valuation multiples based on trailing financial results or consensus estimates for the next 12 months reached levels that looked increasingly demanding. On this basis, rapidly growing enterprise software companies appeared to face especially high expectations. Worries about valuations and the economic uncertainty stemming from the coronavirus pandemic and the upcoming US presidential election meant that investors often wondered how much higher prominent technology stocks could go as they climbed the proverbial wall of worry.

Huge, single-day upswings in shares of individual stocks likewise contributed to fears of a potential bubble in the tech sector and broader market. In some instances, these price moves came in response to robust quarterly earnings that surprised to the upside by a wide margin, reflecting stale earnings estimates from sell-side analysts and a dynamic environment where the coronavirus pandemic has helped to accelerate adoption of some technologies. At the same time, big moves in some popular stocks appeared to be catalyzed by questionable reasons, such as stock splits, that have little bearing on the prospects of a company’s underlying business.

Now, investors are questioning the stability of these gains and how far technology stocks could fall before finding a foothold.

Focusing on Fundamentals

We understand concerns about the near-term outlook for tech stocks. However, we focus on the secular trends that we believe can create value over the long term. Especially during periods of volatility, we believe that our deep knowledge of individual companies and business models can give us an edge in identifying and striving to take advantage of appealing opportunities.

The market’s recent excesses do not compare to the dot-com boom and bust of 20 years ago, when highflying tech stocks offered more flash than substance, in our view. The technology-driven changes taking place throughout the economy are widely acknowledged, even if there is debate about their durability and magnitude.

Today, the dominant online social media, e-commerce, and cloud services platforms have proved the durability of their businesses. The same goes for the software-as-a-service (SaaS) model, where customers benefit from increased flexibility and lower IT infrastructure and support costs, thanks to cloud-based delivery of these solutions. Meanwhile, the SaaS providers themselves have enjoyed steadier cash flows compared with the pattern of feast and famine that came with selling packaged software under perpetual licenses.

The coronavirus pandemic has accelerated adoption of e-commerce, both in established categories and in large markets, such as food and beverages, that had been underpenetrated—a shift in consumer behavior that we believe has staying power in the US and international markets. This strength has filtered through to the targeted advertising provided by large social media companies; in our view, the resilient demand among direct-response advertisers suggests that these online platforms could capture a greater share of marketing budgets during the recovery.

Over the longer term, we see the potential for enterprises to accelerate their transition to the cloud as they seek to improve business continuity, unlock efficiencies, and enhance their competitiveness. We view the semiconductor industry as another area of longer- term opportunity, as the digitalization of the economy should drive increasing demand for advanced chips in data centers, artificial intelligence, automobiles, and industrial end markets.

An actively managed portfolio is not a panacea against volatility in technology stocks, but we believe that our global research capabilities can give us a leg up…

What We’re Watching Next

The coronavirus pandemic has pulled forward significant demand in areas such as e-commerce and cloud-based software, raising questions about the sustainability of these trends and the risk that this near-term tailwind creates a high bar of expectations for next year. We constantly reevaluate the durability of our holdings’ and potential investments’ growth stories as we seek to lean into areas where our differentiated views give us conviction while avoiding impostors whose growth prospects may not prove as durable.

Sign up for US Equity insights from T. Rowe Price

Share this article:

Share on linkedin
Share on email

Election 2020

Our US Political analyst reports from Washington on the campaign trail, see our insights into the impact of the election on your investments.

Important information

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction. Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price. The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.

This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.

© 2020 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.

ID0003608 (09/2020)
202009-1327648

You might be interested in…

Thank you for registering for US equities updates. The latest insights will be sent straight to your inbox, in the meantime access our latest thinking:

Important Legal Information

This site is intended for investment professionals in EEA countries (excluding the Netherlands and the United Kingdom) and for qualified investors in Switzerland.

I have read the terms detailed below and confirm that I am an investment professional or qualified investor and that I wish to proceed.

Information contained in the T. Rowe Price website is not intended for investors in any jurisdiction in which distribution or purchase is not authorised, including the jurisdiction of the reader of this information, where applicable. For example, the information herein is not for distribution to and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States of America to or for the benefit of United States persons.

Information obtained from this site is intended specifically for the individuals who have agreed to these Terms and Conditions and may not be redistributed without prior consent from the T. Rowe Price Legal department.

Past performance of the T. Rowe Price Funds SICAV and other securities is not a guide to future performance. The value of securities and any income generated from them might decrease as well as increase. Changes in rates of exchange may also have an adverse effect on the value, price or income of securities. Investors should also be aware of the additional risks associated with investments in emerging markets, high yield securities and smaller companies.

For EEA (excluding the Netherlands and the United Kingdom):

By accessing this website, you consent to T. Rowe Price collecting information by way of cookies. To find out more please read our cookie policy.

The information is designed for professional investors, including financial intermediaries or members of the media, and is published for informational purposes only. In particular, the information is directed at only informing persons falling within one or more of the following categories:

(a) A government;

(b) A bank or insurance company;

(c) A pension fund or charity;

(d) Persons whose ordinary activities involve them, as principal or as agent, in acquiring, holding, managing or disposing of investments for the purposes of a business carried on by them or whom it is reasonable to expect will, acquire, manage or dispose of investments for the purpose of such a business;

(e) Persons whose ordinary business involves the giving of advice, which may lead to another person acquiring or disposing of an investment or refraining from so doing;

(f) Representatives of the media for corporate and background information about T. Rowe Price.

Persons who do not fall into one of the above categories should not act upon the information contained herein.

Certain persons may have access to information regarding the T. Rowe Price Funds SICAV, an investment company incorporated as “Société d’Investissement à Capital Variable” (‘SICAV’) under the laws of Luxembourg. The T. Rowe Price Funds SICAV sub-funds referred to on the site are only offered by the current prospectus. The prospectus contains more complete information about the sub-funds, including investment objectives, charges and expenses. However, the prospectus and other information relating to the sub-funds will not be intentionally distributed to persons in any country where such distribution would be contrary to local law or regulation.

Raiffeisen Bank International AG, Austria, acts as the paying and information agent for the sub-funds of the SICAV that are approved for public distribution in Austria or from Austria, and Deloitte Tax Wirtschaftsprüfungs GmbH acts as the tax representative for these sub-funds in Austria. Nordea Bank Danmark A/S, is the representative agent of the sub-funds of the SICAV which are approved for public distribution in or from Denmark. J.P. Morgan AG, Germany, is the representative and paying agent of the sub-funds of the SICAV that are approved for public sale in or from Germany. Société Générale Securities Services S.p.A (Italy) is the paying agent of the sub-funds of the SICAV admitted to public distribution in or from Italy. RBC Investor Services España, S.A.U., Spain, is the representative agent of the SICAV sub-funds that are approved for public distribution in or from Spain. Skandinaviska Enskilda Banken AB is the paying agent of the sub-funds of the SICAV which are approved for public distribution in or from Sweden.

This information herein does not constitute investment advice and the products described may not be available to or suitable for all investors. You should consider, if appropriate, obtaining independent professional advice before making an investment decision.

For EEA (excluding the Netherlands and the United Kingdom), the content appearing in this Section of the T. Rowe Price website has been issued by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier.

For Switzerland:

This website is intended for investment intermediaries and contains advertising.

I have read, understood and accept the following general terms and conditions and confirm that I am a qualified investor based in Switzerland within the meaning of Swiss law regarding collective investment schemes and will not pass on any of the information available on this website or downloaded from this website to third parties.

By accessing this website, you consent to T. Rowe Price collecting information by way of cookies. To find out more please read our cookie policy.

The information in the T. Rowe Price website is exclusively directed at qualified investors within the meaning of the Federal Act on Collective Investment Schemes (‘CISA’) and its implementing ordinance as well as according to the most recent interpretation of the Swiss Financial Market Supervisory Authority FINMA with domicile in Switzerland.

In particular the following are considered qualified investors within the meaning of CISA: supervised financial intermediaries (e.g. banks, securities dealers, fund management companies), supervised insurance institutions, public entities and pension schemes with professional treasury management, enterprises with professional treasury management, high net worth individuals who have elected in writing to be deemed qualified investors and independent asset managers who have declared in writing that they will be using the information herein only for clients that are qualified investors.

Certain persons may have access to information regarding the T. Rowe Price Funds SICAV (‘SICAV’), an investment company incorporated as “Société d’Investissement à Capital Variable” under the laws of Luxembourg. The SICAV and certain sub-funds have been approved for public distribution in other jurisdictions such as Switzerland. However, not all of the sub-funds accessible on this website may be registered for public distribution in or from Switzerland. The Swiss Financial Market Supervisory Authority FINMA publishes a list of foreign collective investment schemes which are approved for public distribution in or from Switzerland on their website. First Independent Fund Services Ltd., Zurich, is the representative of the sub-funds of the SICAV which are approved for public distribution in or from Switzerland and Helvetische Bank AG, acts as the paying agent in Switzerland of such sub-funds.

The T. Rowe Price Funds SICAV sub-funds referred to on the site may not be available to or suitable for you. Investment or other decisions should not be made solely on the basis of this website. In particular, you should not enter into any investment before you have read the corresponding fund documents such as the prospectus and the key investor information documents (KIIDs) as well as the annual and semi-annual reports in order to familiarize yourself with the specific risk associated with a specific sub-fund. The prospectus contains more complete information about the sub-funds, including investment objectives, charges and expenses. The prospectus, the key investor information documents (KIIDs), the articles, as well as the annual and semi-annual reports may be obtained free of charge from First Independent Fund Services Ltd., Zurich. However, the prospectus and other information relating to the sub-funds will not be intentionally distributed to persons in any country where such distribution would be contrary to local law or regulation.

The information on this website has been prepared for information purposes only and does neither constitute investment advice or other advertisement or recommendation nor an offer or solicitation to purchase or sell investment instruments, to effect any transaction or to enter into any legal relations. The investment instruments described may not be available to or suitable for all investors. You should consider, if appropriate, obtaining independent professional advice before making an investment decision and be aware of local laws governing investments.

Unless otherwise noted, the content appearing in this section of the T. Rowe Price website has been issued by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. First Independent Fund Services Ltd, Klausstrasse 33, CH-8008 Zurich is Representative in Switzerland. Helvetische Bank AG, Seefeldstrasse 215, CH-8008 Zurich is the Paying Agent in Switzerland. The place of performance and the place of jurisdiction is at the registered office of the Swiss Representative.