Why tech stocks may continue to dominate markets

Find out why tech stocks may continue to dominate the markets, and why the US economy is not running too hot for the Fed. 

It’s another packed calendar for the week ahead. Earnings data, key global economic data and continuing developments in the equity and commodities market means that there will be plenty of opportunities to watch out for. Below, we choose five factors that could drive markets in the week ahead. 

1. The oil price 

There has been a bullish tone to the oil price in recent weeks, crude prices are close to their highest levels since the pandemic struck, as demand slowly recovers and as supply cuts continue to prop up prices. In the US, oil production is down 17% from a year ago, combined with the continued production cuts from Opec, oil supply is starting to look tight. A sign that investors are starting to cash in on the oil price is the fact that the market is in ‘backwardation’. This is a phenomenon whereby the price of oil for delivery now costs more than the same barrel of oil for future delivery. Right now, a barrel of Brent crude is nearing $60, however the futures prices are approx. $5 cheaper, suggesting that traders are willing to pay a premium to get oil now, a sign that they expect prices to rise. The future for the oil price is looking positive. The rollout of the covid-19 vaccine, is giving hope that the global economy will be back to normal later this year. Added to this, the world’s largest economies, China and the US, are expected to show a decent level of growth for 2021. Europe is expected to lag behind, but the UK economy, which has been hit hard by Covid, is predicted to grow by at least 5% this year, which should be enough to help the oil price to rally further. Interestingly, oil demand is expected to continue to grow in the near to medium term, even though governments around the world, including the new US administration, pledge to cut emissions and boost green energy spending. The oil market sees green energy as a distant threat, and for now hydrocarbons are the world’s main energy source, which is why green energy plans from President Biden have failed to dent enthusiasm for oil.

2. What to expect from stock markets 

Ahead of 2021, analysts were fairly confident that stock markets would calm down and that there would be a period of recovery after the pandemic ravaged some sectors of the economy. That was not to be. January saw a relatively weak performance for global stocks, while February has witnessed some extraordinary events, such as the GameStop saga and the reddit-army of retail investors. As we start a new week some retail traders have been badly burnt by the collapse in the GameStop share price, silver also fell by $3 per ounce last week after rallying above $30 last Monday. The retail trader is not dead, but they are suffering, thus it could take a little bit of time before the next target on the reddit-army’s list takes off. 

2021 was also the year when tech stocks would play second fiddle to value stocks, and the stock market would become more balanced. This has also yet to materialise. Even after the stunning rally in the tech majors over the last 12 months, tech stocks are still driving US stocks to record highs. Amazon and Apple sold off a little at the end of last week, Apple was off 0.5% on Friday, however, the tech giants continue to deliver stunning earnings and we expect any weakness to be used as a buying opportunity. Apple had its best ever quarter in Q4 2020, Amazon had its first $100bn quarter and Tesla expects a 50% increase in car deliveries this year. These results are what drives in-flows into stocks, not what drives them away. Thus, we could see tech stocks continue to lead the way for global markets in the coming weeks, with value stocks such as consumer stocks and airlines not coming back to life until governments roll back on lockdowns for good and there is more clarity on global vaccination rates. 

3. Earnings watch 

The earnings focus shifts to the other side of the Atlantic this week, with Ocado and Astra Zeneca in focus. Ocado has been a big winner for most of this pandemic. The market will want to know if its £750mn tie up with M&S food has paid off. Analysts think that it will. Ocado is expected to deliver a 33% increase in revenue for 2020 at £2.2bn, with profits of £123.8mn. Operating an online grocery giant is extremely costly and costs are expected to have surged in 2020, so cash burn is worth watching. Ocado asked investors for £1bn last year, and there won’t be unlimited funds for 2021, so this cash has to last. However, as long as revenues continue to stream in then the cost-base is a price worth paying. Some are looking for Ocado’s stock price to double this year, while we think that a doubling could be too ambitious, we do expect further upside for the share price in the coming months.

Astra Zeneca will also be worth watching, mostly because of its success with producing an at-cost Covid-19 vaccine.  This vaccine is unlikely to have any upside for Astra Zeneca profits, but it could boost its reputation and brand power. Investors will want to know what else Astra Zeneca has been up to and how its $39bn acquisition of Alexion, a drug maker that focusses on immunology, which is seen as the future of pharma, has performed so far. Even with concerns about drug patent expiry, full year revenues are expected to come in 8% higher than last year at more than $26bn. 

4. Economic data 

UK GDP, scheduled for release on Friday, is the key data release to watch this week. This is the preliminary reading for Q4 2020 and is expected to show a 9.4% decline in GDP for the final quarter of the year. This quarter encompasses the November lockdown and regional tiers, along with the latest lockdown that started over the crucial Christmas trading period. Overall, it was a tough year for the UK economy. We expect services to show a sharp decline, manufacturing is also expected to be weak, along with business investment. The trade balance is expected to narrow significantly, which is another sign of weak economic growth for our service-based economy. The trade balance for December is expected to shrink further from the £-4.995bn recorded in November. It is worth looking at the estimate for monthly GDP for January. This is expected to fall by -1.5%, while this is still a contraction of the economy, it would be a much smaller contraction considering the country is in a level 5 lockdown. This is a sign that 1, the UK economy is becoming more adaptable to lockdowns/ more activity is becoming digitalised, or 2, that this lockdown is less stringent than before and more activity can take place. We expect the answer lies somewhere in the middle. Overall, GDP is backward looking data. The FX market looks to the future, and the fast pace of Covid vaccination in the UK should keep demand for the pound buoyant; GBP/USD remains above $1.37 and could build on gains made last week. 

Elsewhere, inflationary pressures in the US, Europe and in China will also be reported. Prices are expected to rise in the US, Germany and in China, where prices are expected to rise to an annual rate of 0.4% for January, vs. -0.4% in December. In the US, prices are expected to rise by 0.3% in January, which would leave the annual rate of headline CPI at 1.5% up from 1.4% in December. While price rises are a reality across the world, we do not think that prices are rising at a pace high enough to thwart the Fed’s support for the US economy, which should be good news for risky asset prices this week.