When does the tech bubble burst?

Rising profits, rising prices: The majority of companies earned better than expected in the third quarter, despite corona, chip shortages and disrupted supply chains. Nevertheless, a change of favourites is hinting the stock exchanges, because the towering valuation of tech stocks is not only driven by profits.

The global champions are showing strength: Despite corona blues, parts shortages and globally disrupted supply chains, the majority of listed companies in the USA and Europe exceeded expectations in the third quarter. Around three quarters of the companies listed in the US index S&P 500 have already reported, and the vast majority surprised positively. 83 percent exceeded their profit estimates and 67 percent generated more sales than expected. With this, US companies are marching forward once again.

Things look a little more modest in Europe: Around two thirds of Stoxx600 companies have already reported, and around 60 percent of them were able to report more profit than expected. 63 percent exceeded the sales estimates. "The Q3 results give a glimpse of optimism," said a fund manager at Swiss asset manager to me on a call the other day. Especially since rising profits and sales are widely spread and show up across all industries: 90 percent of all companies have reported higher profits than expected for US tech companies, but even in the utilities sector it was still 60 percent.

Numerous companies on this and across the Atlantic have subsequently increased their profit and sales forecasts for 2021. The price rally in the stock markets then picked up speed again: valuations have risen significantly again, especially in the technology sector, even before the favourite of shareholders.

Chip shortage, disrupted supply chains - who cares?

Issues such as labor shortages, chip shortages or disruptions to the global supply chain have not been able to slow down the stock rally in recent weeks - although many companies have pointed this out in their quarterly reports. Tech-Darling Apple, for example, estimates that supply bottlenecks in the third quarter cost the iPhone manufacturer around $6 billion and the problem will worsen in the fourth quarter. Amazon expects around $4 billion in costs for the fourth quarter due to a lack of labor and disrupted supply chains. For these reasons, the sporting goods manufacturer Nike lowered its forecast for 2021, and the US chip giant Intel only dares to look very cautiously for 2022. German car manufacturers such as Volkswagen and Daimler have also reduced their sales forecasts for 2021 due to the chip shortage after a brilliant first half of the year.

Only a few companies were able to escape this headwind. Many expect these problems to continue in the fourth quarter and in some cases even next year.

Many companies use the flood of money - for share buybacks

The fact that valuations in the stock market continue to rise despite these obvious problems has to do not only with the solid profits of many companies, but also with the flood of money from central banks worldwide. Companies in the USA and Europe were flooded with cash by the FED and ECB immediately after the start of the coronavirus crisis, and even just under two years after the start of the pandemic, central banks keep the cash flood open, money is still extremely cheap.

Companies have begun to use their capital: Ideally, it is increased investments such as in the energy, oil and gas sectors that are urgently desired by central banks because they are causing growth. But many companies simply use the cheap money to maintain the price by buying back their own shares. According to research by the Swiss fund manager I talked, as mentioned earlier, share buybacks in the S&P 500 increased by 13 percent in the third quarter, compared to the previous year, the increase is just under 70 percent. More than 80 percent of share buybacks were financed with cash: Share buybacks worth $730 billion have already been announced this year.

That is 730 billion just for course maintenance: This is already more than in the entire pre-corona year 2019. As long as money is as cheap as it is now, share buybacks are a popular means of further driving up the price and thus the valuation of your own company.

Rising interest rates should cause changes

This remedy works as long as money remains cheap. But the Federal Reserve began to change direction cautiously last week. The central bank reduces the volume of its monthly bond purchases. Rising interest rates in the second half of 2022 are likely.

While the highly rated technology titles are likely to suffer from rising interest rates, companies in the financial sector hope for relaxation. And rising energy prices have also caused a change of favourites in recent weeks: Companies from the oil, gas and energy industries, which have been avoided for a long time, have increased as well as stocks of large consumer goods manufacturers, who can pass on higher prices to consumers with their pricing power and thus defy inflation.

Even companies from the travel and tourism industry such as Lufthansa, TUI, Carnival or Norwegian Cruise could be among the new favourites: The announcement by the pharmaceutical company Pfizer that it has applied for approval for a corona drug that could significantly mitigate serious disease courses in infected people already strengthened the industry last week. In addition, the USA now also allows the entry of vaccinated travellers from the EU again.

Everything on tech - a lot of capital is invested in the US technology sector

On the other hand, tech stocks such as Netflix or Zoom, which had been one of the biggest corona winners as "stay-at-home shares", were already under great pressure. Tesla's current price slide also shows: After the brilliant tech rally worldwide, many investors are increasingly willing to bring profits to safety and expand the portfolio.

Apple, for example, is still rated 27 times the expected profit despite the above difficulties. For Google's mother Alphabet, whose valuation rose above the $2 trillion mark on Monday, the price/profit ratio is currently even slightly above 27 (Alphabet shares temporarily reached a record high on beginning of November at $3010). Alphabet has increased by more than 70 percent since the beginning of the year. In addition, a lot of capital continues to be concentrated in the tech sector: The three tech giants Microsoft, Apple and Amazon alone currently account for 15 percent of the market value in the S&P 500 - an index with 500 companies.

This is also a reason to think about changing your favourites.