A “Wall of Cash” Coming
Why tech is on the cusp of a huge resurgence… today’s special event with Luke Lango… three tailwinds behind tech over the coming years
A massive “wall of cash” is headed into growth stocks. And we’ve identified three reasons why.
That comes from our technology and hypergrowth expert, Luke Lango.
Today, we’re going to dive into these reasons.
Being candid, if I were to pick a handful of Digests that I believe stand out as offering outsized value for readers, today’s issue would fall into that group.
That’s because the information we’ll highlight from Luke breaks down complex, MBA-level topics into something that’s easily-understandable… it outlines what the investment future holds… and it offers a simple, clear action step to help you take advantage of it today.
We’ll get into all of that below.
Now, a quick notice…
Today’s Digest goes hand-in-hand with a special, live event that Luke is holding this afternoon at 4 PM ET. Though we’ll hit the highlights of the topics just identified, for even more details, join Luke later today for what he’s calling the 10X Anomaly Summit.
In short, Luke believes we’re standing at the cusp of “an enormous multi-year run higher in early-stage tech stocks as these companies redefine the world in the 2020s.”
If you find yourself skeptical about this idea for any number of reasons – rising inflation, high valuations, the rotation into value – that’s completely understandable. But that’s all the more reason to join Luke to find out why those concerns might be overblown…and potentially, putting you at risk of missing out on a period of extraordinary wealth creation.
So, today, in preparation for Luke’s 10X Anomaly Summit at 4 PM ET, let’s tackle why tech investors are setting up to ride a massive wave of cash.
***A big-picture overview of tech’s recent stumble
For newer Digest readers, Luke is something of a prodigy.
From a perfect score on his SATs, to an illustrious academic career at CalTech, to being the #1-ranked analyst (out of more than 15,000 investment experts) on TipRanks, Luke is no stranger to success.
That’s why when he began a research experiment in May of 2020 called Project 10X, we weren’t surprised to see some big returns. However, we were surprised to see the volume of them. Since May of 2020, he has now highlighted nearly 100 triple-digit returning stocks and six different 1,000% gainers.
But as tech-investors know, the market that created many tech winners in the wake of the Covid-19 bear market has changed. Over the past several months, tech stocks have been battered and bruised.
Well, whereas 2020 was marked by low growth and low rates, 2021 has been the opposite – accelerating economic growth and rising rates.
This resulted in a market dynamic that’s historically bad for growth stocks – spiking yields.
Here’s Luke with more:
Yields shot higher because the U.S. economic outlook rapidly improved.
Everyone was getting vaccinated. Restaurants and retail shops were reopening. People were booking flights. Consumer confidence was rebounding. Retail sales were surging. Manufacturing activity was picking up.
The U.S. economic recovery was gaining significant momentum, which increased inflation and growth expectations. That pushed yields higher and weighed on tech stocks.
Inflation is the death of growth stocks, since it simultaneously weighs on valuations, dilutes the present value of future profits, makes growth more expensive to fund, and crimps profit margins.
***Inflation goes hand-in-hand with something Luke calls “the most important metric for hypergrowth investing”
So, why, exactly, is inflation such kryptonite for tech stocks? And what is this important metric for hypergrowth investing that Luke refers to?
It’s the same answer…
It’s an an MBA-level concept called the “cost of equity.” It includes variables such as the risk-free rate and the equity-risk premium. But let’s not get into the weeds. Instead, here’s Luke to tell you what you really need to know:
The cost of equity drives stock prices. When it’s low, the future carries more value than the present. Which means that growth stocks outperform, as they derive most of their value from future expectations.
When it’s high, however, the present carries more value than the future, meaning that value stocks tend to outperform for inverse reasons.
It’s heavily correlated to interest rates and economic health, which have changed dramatically in the past year.
In recent months, as yields have spiked, the cost of equity has climbed too. And as the historical relationship goes, this has weighed on tech stocks.
This leads to perhaps the most important question that tech investors are wrestling with today…
***Will yields, inflation, and the cost of equity continue climbing, or is the worst largely over?
This ties into the first of Luke’s reasons why a wall of cash is headed into growth stocks – namely, the economic data is slowing, causing 10-Year Treasury yields to fall and growth to become less diverse. This is leading to money flowing back into tech stocks.
Here’s Luke to break it down:
The economic data over the past month – from jobs reports and to jobless claims to consumer confidence and retail sales – has come in consistently below expectations, and it is showing a clear and undeniable slowing trajectory from its April highs.
Just look at Citi’s Economic Surprise Index, which is a broad-basket measure of how real economic data is performing relative to expectations. It’s been on a rapid decline over the past month, and now it barely hovers above zero.
What’s going on under the hood?
Well, a broad economic reopening of the kind we saw in March and April only happens once in a lifetime – it’s a temporary phenomenon.
Right now, consumers are exhausting their pent-up demand. We’ve already gone to restaurants, done our shopping, and bought new cars. As a result, demand is moderating to more normal levels…
Going forward, then, demand in the economy will moderate, supply will increase, and the net result will be a low-growth, low-inflation environment – much like the one we’ve been immersed in for the entire 21st century.
In this type of environment, yields remain lower for longer, and tech/growth stocks outperform. In other words, this recent value-stock outperformance is temporary, and will disappoint investors hoping for sustained value gains.
***The second reason why tech stocks are about to enjoy a wave of cash
The tech stock resurgence has a second tailwind…
The cryptocurrency correction.
To understand why this is bullish, let’s back up a moment.
If you’re a conservative investor, it’s likely you gravitate toward two assets – bonds when the markets feel volatile and precarious, and value stocks when the investment environment feel sturdier and you’re hoping to amplify returns.
More aggressive investors have their own version of this risk/reward tradeoff. But in their case, growth stocks are the default position and cryptocurrencies are the “shoot-for-higher-returns” asset.
Well, what’s happened to cryptocurrencies recently?
The sector has suffered a substantial wipeout, leaving more aggressive investors looking for their version of safety. Yesterday alone, a heavy selling-day shaved 10% of the global crypto market capitalization.
Here’s Luke for the impact of this selling pressure:
Guess what has happened during this crypto decline? Growth stocks have outperformed.
As cryptos have dropped over the past few weeks, growth stocks have shaken out of their slump and powered higher.
We suspect this trend will hold for the time being.
***Finally, valuations on tech stocks have corrected much lower and are now in line with historically normal standards
Here’s Luke’s quick-take on this reality:
Previously, tech stocks were richly valued. Today? Not so much.
With economic growth slowing, yields flattening out, and cryptocurrency hype dying down, these “normal” valuations provide a solid base for tech stocks to turn into the market’s biggest winners once again.
In our May 25th Digest, we illustrated Luke’s point with Apple. We pointed out how the stock is actually trading beneath its early-September price. Meanwhile, its earnings have been breaking records.
So, what’s the outcome of higher earnings and lower stock prices?
A declining valuation.
In our issue, we noted that Apple’s price-to-earnings ratio had fallen more than 30% since the start of the year. And its PEG ratio had dropped from greater than “6” back in January of 2020, to 0.72. Readings less than “1” are generally considered more desirable and undervalued.
So, what’s the actionable takeaway for investors today?
***Buy into top-tier technology stocks
Technology is the future of everything.
We know that electric, self-driving vehicles will become ubiquitous over the next few decades.
We know that solar, wind, and hydrogen will power the world by 2040.
We know offices, gyms, casinos, malls, and more are increasingly become virtualized.
That’s why smart investors like you and me want to buy growth stocks no matter what… the sort of stocks we pursue in Project 10X.
These stocks represent the future, and the way to score life-changing returns in the stock market is by investing in the future. So, while value may be shining right now, folks who buy tech stocks today will be incredibly happy in 3, 5, 10-plus years.
And so, the question I’ve been the asked the most over the past few months isn’t “Should I buy the dip in tech stocks,” but rather “When should I buy the dip in the tech stocks?”
The answer? Right now.
We’re running long, so we’ll start wrapping up. But for all the details we haven’t had time to delve into during today’s Digest, join Luke today at 4 PM ET.
For tech investors, 2021 has been tough so far, but there’s light at the end of the tunnel. That means now is the time to make sure you have at least part of your portfolio poised to capitalize on the coming tech resurgence.
Here’s Luke on this note:
At this moment, more than perhaps any other time in history, we’re on the cusp of a critical inflection point that could hand out 1,000% gains like clockwork.
This isn’t guesswork – my team and I have done, and continue to do, the hard research to test our market hypotheses.
What we’ve found is that a massive “wall of cash” is headed into growth stocks.
Join us today at 4 PM ET to learn more, and find out exactly what Luke is doing to prepare his subscribers for this. Just click here to join us for the 10X Anomaly Summit.
Have a good evening,
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.