Apple passes the $2 trillion mark … another sign of tech domination … addressing overvaluation fears … what will drive wealth this decade
Apple is worth more than Italy.
Italy’s GDP, at least.
Yesterday, the tech giant became the first U.S. public company to cross the $2 trillion mark in market value.
To put this astonishing milestone in context, the nominal GDP of Italy is $1.99 trillion (as of March).
At this pace, Apple may soon be knocking off France ($2.71 trillion) and the UK ($2.83 trillion).
You may recall that Apple was the first U.S. company to pass the $1 trillion mark back in August 2018.
To double from a starting size of $1 trillion, in just two years, would be astonishing enough by itself. But the reality is Apple doubled far faster … in just five months to be exact.
In the chart below, you’ll see Apple’s market cap. I’ve added a black context-line beginning in August 2018 when Apple hit the $1 trillion mark.
As you can see, the market cap fell then rallied, then fell.
At its coronavirus-March-lows, Apple’s market cap had dropped back to roughly $1 trillion.
Since then — in just five months — Apple’s stock has doubled, and its market cap has topped $2 trillion.
***This is just the latest evidence of the “tech domination” defining today’s stock market
The news is in lockstep with something our macro specialist, Eric Fry, has been writing about for months — the “Technochasm.”
This is Eric’s term to describe the widening wealth gap that’s happening in America (and around the world), thanks in large part to huge investment gains coming from select, technology investments.
As Eric has highlighted on numerous occasions, technology is creating a tale of two markets.
One is thriving, surging ahead on huge profits from cutting-edge products we all want …
The second market is lagging — possibly sliding toward bankruptcy — as technological advances threaten yesterday’s business models with obsolescence.
Yesterday’s Wall Street Journal coverage of Apple’s milestone reads as though straight from one of Eric’s Technochasm-themed issues (bold added):
Consumers’ increasing reliance on technology is driving growth for Apple and other large internet companies such as Amazon.com Inc.
That has created a chasm between the tech industry and other sectors from energy to travel that have seen the coronavirus sap demand and fuel a wave of bankruptcies.
***It’s not just “big tech” that’s been soaring — “small tech” has been generating even bigger gains
To illustrate, I’m looking through Matt McCall’s Early Stage Investor portfolio, seeing gains of 73% in a small tech stock recommended on April 1 … 325% from a second, small tech stock recommended on April 1 … and a monster gain of 494% from a third tech stock recommended one month later, on May 1.
A simple visual of this “tale of two markets” is found by comparing the charts of the tech ETF, XLK, with the S&P 500 Equal Weight Index.
To make sure we’re all on the same page, the S&P Index is comprised of a shade more than 500 of the largest companies in the United States. However, all of these companies don’t get equal representation in the index. That’s because the S&P is “weight-averaged.” In other words, the bigger the company, the more “representation” it has in the index.
Right now, the biggest companies in the S&P are all tech. Given this, when we look at the S&P, we’re not getting an accurate depiction of “average stock” performance. We address this by looking at the S&P Equal-Weight Index.
As you can see below, while XLK is up 111% in the last three years, the S&P Equal Weight Index is up just 20%. In other words, tech is outgunning the average S&P stock by more than 5-to-1.
***The hand-wringing and anxiety about today’s valuations
Many investors are looking at this tech-fueled market rally with a growing concern that boils down to one thing …
Back to the WSJ:
… the S&P 500’s march back to its high has left the stock market priced for perfection and dangerously exposed to another drubbing, some analysts say.
The index currently trades at 22.6 times projected earnings over the next 12 months, according to FactSet.
The last time stocks traded at that level was in 2000, before the bursting of the dot-com bubble.
Most of the big tech stocks are particularly pricey, trading at 26 times forward-looking earnings.
The WSJ went on to profile a money manager who, given these concerns, has been rotating client money out of big tech into beaten-up non-tech stocks.
Another wealth adviser has been hedging his client’s tech positions.
Now, this valuation concern is valid, as are the moves taken by these two money-managers. After all, it’s hard to argue with raw data.
However, it’s important to keep in mind the difference between short-term and long-term.
Tech’s current, lofty valuations are more short-term in nature … a potential 10%, 15%, even 30% pullback in tech would also be more short-term … and the idea of bailing on tech now assumes you’re able to time the markets, which is also a short-term concept.
To be clear, if you’re an investor who has less room to absorb market losses (perhaps in retirement), then by all means, today’s tech valuations deserve your attention. Even more so if big tech has grown to occupy an overweight position in your portfolio as it has for so many investors.
But if you don’t fall into that group, let’s look at why you should ignore all this and focus on a longer-term perspective.
For help, let’s return to Apple.
***The tech giant has had more than its fair share of “busts” along the way
It may not feel this way today as Apple tops $2 trillion and continues surging, but the stock has had plenty of nerve-rattling drawdowns in recent years.
From April 01, 2012 through May 17, 2012, Apple fell 17% …
From September 18, 2012 through April 19, 2013, Apple fell 44% …
From July 21, 2015 through June 27, 2016, Apple fell 29% …
From October 4, 2018 through January 3, 2019, Apple fell 39%…
From May 6, 2019 through May 29, 2019, Apple fell 16% …
Finally, from February 13, 2020 through March 23, 2020, Apple fell 31% …
Despite these double-digit busts, since 2012 — which was the year of the first drawdown we referenced above — Apple has climbed 839%.
With this context in mind, the question shouldn’t be “is Apple (and by extension, “tech”) going to pullback 30% tomorrow?” but rather “does Apple (and tech) have the legs to create more massive gains over this newly-started decade?”
Answering for Apple specifically, we’ve already brought you news of Apple Glasses, which will bring augmented reality to your field of vision …
Then there’s the Apple Car.
Rumor has it that it will launch between 2023 and 2025.
Reliable Apple analyst Ming-Chi Kuo … believes the car will be Apple’s “next star product” with Apple able to offer “better integration of hardware, software and services” than potential competitors in the automotive market, with Apple-designed chips manufactured by TSMC.
Then, of course, there’s the comment from CEO, Tim Cook from last year in which he said the company is quietly working on new products ready to “blow you away.”
Who knows what that means?
But do you think these mystery innovations will help Apple’s stock recover from, say, a 30% pullback sometime in the next 12 months?
Do you think the innovations we’ll see from Silicon Valley companies will offset potential 15%-40% pullbacks as this decade rolls on?
A moment ago, we saw six different double-digit declines from Apple being steamrolled by an eight-year, cumulative return of 830%.
That points toward a question:
Which will you focus on — the short-term or the long-term?
As we wrap up, yes, tech is expensive today.
Yes, we could see a double-digit correction in the near future.
Yes, tech might even spend six, twelve, or even eighteen months trading sideways.
But most importantly, yes, tech is still the best game in town for making a fortune this decade.
Have a good evening,