‘Everybody loves a party … but, inevitably, after a big party there’s a hangover,” billionaire investor Stanley Druckenmiller said last week as stock markets seesawed amid fears that a new tech bubble was about to burst. “Right now, we’re in an absolute raging mania,” he said.
And at times it did look like a tech bubble was about to burst again. Last Tuesday, Tesla’s shares fell 21% and Elon Musk’s net worth plunged $16.3bn (GBP12.7bn), the largest single-day wipeout ever for a member of the Bloomberg Billionaires Index. Amazon’s founder, Jeff Bezos, lost $7.9bn. The whiplash continued throughout the week but, for many market watchers, it is still too soon to call time on tech’s stellar rise.
The sums lost are mind-bending – Musk’s $16.3bn loss is the amount China (population 1.4 billion) set aside to tackle coronavirus in March. However, the losses have hardly dented the historic fortunes the “techno-crats” have built during the technology boom and, for now, tech’s dominance seems intact.
The US tech giants have been on a tear for a year and have only increased in value since coronavirus hit the US. Last Friday, Bloomberg pegged Bezos’s fortune at $184bn, up $69.3bn from the start of the year. Even with Tesla’s recent heavy losses, Musk’s fortune is up $64bn for the year, ending Friday at $91.5bn.
If this is a tech bubble, it is made of stronger stuff than the one that burst at the turn of the millennium. That bubble was epitomised by young startup companies such as Pets.com, which went out of business just nine months after its much-hyped share sale. This one is being inflated by some of the biggest, most profitable companies the world has ever seen.
Alan Patrick, co-founder of analytics firm DataSwarm, has seen his share of tech bubbles and, while he sees plenty of “froth” at the moment, he doesn’t yet consider this is a bubble about to pop. Even today, with tech stock prices still so high, he said, we may only be at the “foothill of bubble phase”.
“The rise has mainly been from companies that stand to profit hugely from a world that has a ‘phase shift’ to a more digital, less physical world – Zoom, Amazon, Microsoft, Netflix, Apple all benefit hugely, as do the Covid drug and healthcare companies whose shares have rocketed,” Patrick said.
One big difference between today’s tech titans and their dotcom predecessors is size. These are huge companies that, in the main, also make huge profits. Last month, Apple’s valuation passed $2tn, the first US company to pass that milestone. Earlier this month, Apple was worth more than all the companies listed on the FTSE 100 index of the UK’s biggest firms combined.
Business has boomed for Apple, Amazon, Facebook and Google even as the wider US economy has collapsed. Tech has been a safe haven, and an industry achieving growth, at a time when investors have struggled to find safety or growth elsewhere.
But just because the situation is different this time, it doesn’t mean there isn’t a tech bubble to burst. “All of the elements of a bubble environment remain in place,” the strategist Chris Senyek of Wolfe Research wrote in a research note last week. And that bubble, he argued, was most inflated in the Nasdaq 100, the tech-heavy stock index whose biggest components include Apple, Amazon, Microsoft, Alphabet (Google’s parent), Facebook, Netflix and Tesla.
Approximately 29 million people are still on unemployment benefits in the US, and there are signs that the economic bounce-back from the coronavirus lockdowns has slowed. And yet US stock markets have remained close to their heady highs as the Federal Reserve has put its weight behind them and kept interest rates at close to zero.
But for Senyek and others, the recent wobbles may signal trouble ahead. “Typically, bubbles are unwound when the Fed takes away the punchbowl. Obviously, this is very unlikely to happen any time soon. However, this bubble can still be unwound by sustained economic disappointments,” he wrote.
The recent selloffs came after tech shares were driven to new highs by decisions by Apple, Tesla and others to split their stocks, a move that made them cheaper to buy but did nothing to change the fundamentals of their businesses. They were also pushed higher by a huge bet on tech by the Japanese conglomerate SoftBank that was tied to around $50bn worth of individual tech stocks.
The real problems may emerge only when the pandemic ends. Tech thrived as the world moved online, but will we ever want to Zoom again once it’s over? Yes, some fundamentals have changed – bricks-and-mortar shopping, deeply troubled before coronavirus, may never return to its old levels. But tech’s current dominance may also wane once the real world reopens.
Then there are the political headwinds. With coronavirus and the US elections dominating the headlines, tech’s growing monopolies have become a side issue. But if Europe and the US government have become increasingly concerned about Big Tech’s dominance, such concerns will only have been amplified by the lockdowns – and, post-virus and post-election, tech may finally face real political opposition.
DataSwarm’s Patrick said he would expect to see more classic bubble signs before any real blowout, such as “large numbers of consumers being sucked into investing – though that is starting, with new financial trading apps offering free share dealing and owning fractions of shares in companies”.
But he cautioned that in the current environment, anything was possible. There are too many factors that could lead to a stock market blowout, including a second wave of Covid infections, the possibility of more dire economic news or the outcome of the US election – arguably the most volatile in living memory.
“I don’t think there has been a time, probably since the end of the Cold War, when there are so many highly possible very large shocks that could stop the developing bubble in its track and crash it,” he said.
If and when that unwinding will happen is anyone’s guess. “I have no clue where the market is going to go in the near term. I don’t know whether it’s going to go up 10%, I don’t know whether it’s going to go down 10%,” Druckenmiller told CNBC.
“But I would say the next three to five years are going to be very, very challenging.”
o This article was amended on 13 September 2020 to correct a dollar-to-sterling conversion; Elon Musk’s net worth fell by the equivalent of GBP12.7bn, not GBP12.7m as an earlier version said.