Technology & Materials: Do You Take the Over or the Under?
As each day passes and more evidence of some sort of bottom in economic activity emerges, the chances of market rotation into the more beaten down areas of the global equity market would seem to be rising. In fairness, this is likely not 2012 or 2016 in which pent up demand acted as a loaded spring to propel a V-shaped bottom. Even still, the probability of a left tail outcome (recession) is falling. In this scenario we would expect relatively less exuberance toward growth and quality and relatively more exuberance toward value and cyclicality. In sector terms, one expression of this might look something like technology stocks taking a back seat to materials stocks. And as it turns out, valuation data also make such a rotation interesting. In the six charts below we plot the median price to book value for stocks in the tech and materials sectors for each developed market region. In each case, we find the median tech stock to be at or near the all-time high valuation level (outside of the tech bubble) and the median materials stock to be at a recessionary-type valuation level. With that left tail of economic activity coming in, do you take the over or the under on tech valuations? How about materials valuations?