By Bill Studebaker, CIO & President, ROBO Global
2020 has yet to let up. We are in historic times on so many different fronts—socially, politically, economically… the list goes on and on. Still, I am optimistic that we will continue to learn from these unique circumstances and make the world a better place. We will put our best foot forward, just as we have always done during tumultuous times.
One person that is clearly doing just that is Fed Chairman Jerome Powell. I doubt anyone envies his position at the moment, or his constant struggle to balance the fragile relationships between policy, the real economy, and the financial markets. At the end of August, Chairman Powell gave equity investors pretty much everything they could ask for with the announcement of a major policy shift to average inflation targeting. At a time when interest rates are at historic lows, this flexible framework enables the Fed to avoid raising rates according to the traditional formula that dictates a change when inflation hits 2%. Powell stated that the new policy will allow inflation to run “moderately” above the usual 2% goal “for some time” before the Fed raises interest rates. For tech investors, this news is more than welcome. Not only does it mean that rates are likely to be lower for longer, but the change also gives cyclical bulls ammunition to believe the Fed could let rates run freely for quite some time.
It’s just one more reason for tech investors to feel bullish at the moment. As we’ve seen in recent months, the global pandemic has accelerated the push toward technology innovation that was already in play. In the past eight months, technology has become the epicenter of nearly every global business model. That momentum was reflected clearly in the ROBO Global indices in the month of August, with the ROBO index rallying 5.46% and the THNQ index gaining 7.10% vs. ACWI’s increase of 6.14%.
Ironically, it’s clear that tech investors may have COVID to thank for that growth. At a time when businesses face unprecedented challenges due to the pandemic, the prevailing bullish sentiment is that COVID has unlocked a great deal of sustainable value to a variety of ‘winner’ business models that are poised to benefit in both the short term and the long term. A great example is Salesforce, a constituent in the THNQ index. Salesforce blew away earnings expectations as enterprises around the world accelerated their digital transformation strategy to survive and thrive amid the pandemic. But that growth was a long time coming. Salesforce’s IPO took place back in 2004, and though it has been a top pick among investors focused on Cloud services, increases in the company’s stock price were never dramatic—until COVID. In August, Salesforce shares advanced 25% post print and finished the month +39.9%. EPS was $1.44 was higher than consensus expectation of $0.67 due to a $0.58 gain on strategic investments. Revenue of $5.15B was up an impressive 29% Y/Y, marking the first time revenue hit a $5B quarterly run rate. Clearly, Salesforce is benefitting from the pandemic, and that growth should last for some time as digital transformation continues in the coming years.
Of course, Salesforce has made recent headlines for more than just the jump in its stock price. On Tuesday, the company became the first Cloud software company to enter the blue-chip heavy Dow Jones. I can’t think of a clearer sign of what is driving the economy, the market, and investor focus than the swapping out of the Dow’s oldest member, Exxon Mobil (XOM), for Salesforce. The replacement of Pfizer (PFE) and Raytheon Technologies (RTX) with technology leaders Amgen (AMGN) and Honeywell International (HON) was the icing on the cake.
From the market’s perspective, choosing SaaS over Oil & Gas is a no-brainer. And for technology investors, this is the moment we’ve been waiting for. The pandemic has put business models to the test, and it is becoming clearer than ever that technology is the key to helping businesses of every kind ‘put their best foot forward.’