The technology was already showing above market returns before the pandemic, but the advent of COVID-19 in 2020 supercharged its outperformance. As the physical economy practically took off, digital businesses saw their earnings skyrocket; By the end of that year, TEC had outperformed the S&P 500 by about 20%.
“By 2021, investors have become too complacent,” said Vitaly Mosonov, global technology analyst at TDAM. “Many people began to believe that Covid and low interest rates would always be with us, which led to a higher share price performance in the second half of 2021.”
Then the tables turned. After a multi-month streak of decades of high inflation, investors began to seriously consider the prospect of higher rates, and how it could weigh on the future earnings of high-growth sectors like tech. After peaking in November, the sector’s outperformance began to ease.
It wasn’t until late January that tech firms could report their earnings outlook and ease shareholders’ fears. While PayPal and Meta, nee Facebook, stunned investors with their poor outlook, Mosonov says both were outliers. Overall, companies in the broader tech sector reported strong fundamentals through their earnings and outlook for the year.
“What is unfortunate today is that the focus has shifted,” Mosonov said. “Given the macro environment and Russia’s invasion of Ukraine, people are starting to fear everything, and there’s a lot of tech sales going on indiscriminately.”