Will tech shares ever rise again?

The technology sector has led the 12-year bull market but has slumped in the past few weeks. Is this the end of a golden era?

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The share market rally of 2020, and perhaps the entire decade prior to COVID-19, was led by technology stocks.

For example, the S&P/ASX All Technology Index (ASX: XTX) put on 125% last year after the pandemic crash in March 2020.

And the Nasdaq Composite (NASDAQ: .IXIC) has gained a stunning 382% in the last 10 years.

But the last couple of months has seen a violent rotation from growth to value stocks, as investors fear increasing inflation and bond yields.

So is this the end of an era? Have technology shares had their day?

The golden years are done

Watermark Funds Management chief investment officer Justin Braitling reckons two big forces that buoyed tech are fading fast.

"The golden years of leadership from technology and growth seem, for the time being, behind us," he said in a memo to clients.

"Of the two major tailwinds pushing technology shares higher — the health crisis and low interest rates — one is abating (COVID) and the other is reversing (real interest rates)."

And interest rates are "likely to keep moving higher in the medium term", according to Braitling.

"The prospects of a second tech boom to complete this bull market looks less likely," he said.

"As the fundamental drivers of technology adoption are very much intact, the sector can still perform but is unlikely to lead the way it has in recent years."

It's not the end for tech shares though 

While they may no longer be market leaders, there is still plenty of upside for the technology sector, said Braitling.

"There is still tremendous momentum in each of the enablers of technology adoption: e-commerce, cloud and SaaS computing, the internet of things, and big data, to name the main ones," he said.

"This has become obvious to businesses and households awash with liquidity. They will keep investing given penetration is still early for many of these services."

The pandemic absolutely accelerated adoption of many technologies out of necessity. And while this revolution would slow down, the coronavirus has forever changed the mindset of many.

"COVID was a great awakening to the benefits of a digital economy — that message has not been lost on a single business we speak to," said Braitling.

"Those that lead in technology will invest to stay in front and the slow adopters caught wanting through the crisis will spend to catch up."

The fund manager noted, in the past 10 years, earnings per share (EPS) for tech stocks have outpaced non-tech businesses. This is despite the share prices for the tech sector climbing up.

T Rowe Price Group Inc (NASDAQ: TROW) portfolio manager Scott Berg said much the same in a webinar on Wednesday.

"Over time, if you invest with reasonable valuations, stock prices follow earnings and cash flows," he said.

"A lot of the most dynamic growth companies [today] actually have incredible economics — meaningfully different than companies back in the last tech bubble. They have very high margins, very low capital requirements, they have typically net cash balance sheets with tremendous operating leverage."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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