Tech stock rally hogs global market spotlight but ownership not cheap

(Reuters) - Soaring shares of Apple Inc, Alphabet Inc and Tencent Holdings Ltd this year have made technology a top global performer, with few signs that investors are worried that rising valuations might be increasing the risk of a downturn.

The technology rally’s international scale expanded last week, when social network Tencent became the first Chinese firm to be worth over $500 billion, briefly surpassing Facebook Inc. Tencent’s stock has surged 121 percent in 2017 and is up 20 percent in the past month.

Chinese Internet seller Alibaba Group Holding Ltd is close behind, with a market capitalization of $481 billion, more than double from the start of the year.

The S&P 500 information technology index has gained 39 percent in 2017, with the sector now accounting for a quarter of the overall S&P 500's $24 trillion value, the highest proportion since the dot-com bubble in 2000. (tmsnrt.rs/2ADC9B1) (tmsnrt.rs/2AcePtq)

Hong Kong’s Hang Seng technology index is up 99 percent this year, trading at 43 times past earnings.

Nearly nine years into a bull market, investors are fawning over technology stocks to a degree they have not in over a decade, and they are willing to pay up for the privilege of owning them. This year, they have poured $12.6 billion into U.S. technology mutual funds and ETFs, the most since 2000 at the end of the dot-com boom, according to Thomson Reuters Lipper.

With subdued economic growth around the globe, including the United States, investors feel confident latching onto a sector that has persistently delivered above-average growth.

“Technology applies to all lines of businesses, whether it’s Amazon to grocery stores or warehouses run by robots,” said Bucky Hellwig, senior vice president at BB&T in Birmingham, Alabama. “Technology is something investors feel really comfortable with.”

Asia's five largest tech companies, including Tencent and Alibaba, grew their sales by 20 percent year-over-year in the first half of 2017, outperforming the 13-percent sales growth of the five largest U.S. tech companies, according to Thomson Reuters data. (tmsnrt.rs/2Acpggf)

Tencent, Alibaba, Samsung Electronics Co Ltd and Taiwan Semiconductor Manufacturing Co Ltd now account for four of the world's 10 largest tech companies by market value. (reut.rs/2Adplk4)

Silicon Valley heavyweights and other tech companies have consistently been a leading driver of S&P 500 earnings growth in recent years, a trend expected by analysts on average to continue through the second half of 2018.

S&P 500 tech earnings grew 24 percent in the third quarter of 2017, the highest since the first quarter of 2011, Thomson Reuters data shows. Third-quarter earnings for all S&P 500 companies rose 8.3 percent from a year ago, but without tech, that growth rate was just 4.4 percent. (reut.rs/2ACW4jC)

“I‘m not too worried about the (tech) valuations as there’s a growth paradox: 96 percent of the world’s GDP is growing, but only 40 percent of it is above-average growth,” said Brian Jacobsen, a multi-asset strategist at Wells Fargo Asset Management. “In the near-term, high valuations for high growth companies can persist.”

Soaring stock prices have left the S&P 500 IT index trading at nearly 19 times expected earnings, versus the S&P 500's P/E multiple of about 18, according to Thomson Reuters Datastream. (reut.rs/2ACFW1k)

Investors run the risk of becoming convinced that technology companies’ hyper-growth and surging stock prices could become permanent, forgetting lessons learned following past booms and busts, like the dot-com bubble and the 2007-2009 financial crisis, Richard Bernstein Advisors Chief Executive Richard Bernstein wrote in a recent research note.

During the dot-com boom in 2000, Wall Street paid as much as 48 times expected earnings to own the S&P 500 IT index.

“Investors seem primed to get burned yet again in technology shares, but it is still probably too early to worry,” Bernstein wrote.