The revenue warning issued on Monday by Apple Inc. is another test of investors’ long-running love affair with so-called growth stocks.
For weeks, investors have bet that the giant technology stocks that have led the market would march on despite the disruption and economic slowdown in China caused by the coronavirus. They’ve continued to put their faith in companies that promise rapidly increasing profits and revenue.
“Investors believe they’re better positioned to weather any economic storm,” said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management Co., speaking of growth stocks. “Even if there’s a recession, people will keep using Facebook.”
Investors could take Apple’s warning on Monday that it won’t meet revenue expectations for the current quarter as a sign that the growth stock run is over. Or they could see the downturn as temporary and specific to Apple.
Apple was the most vulnerable of the popular tech giants, which include Microsoft Corp., Amazon.com Inc. and Google parent Alphabet Inc., because these companies are software and cloud-computer providers. Apple depends on a sophisticated supply chain that runs through Chinese factories to produce its physical products, including the iPhone.
Either way, growth stocks like Apple are vulnerable to a downturn. The big names are sitting on double-digit gains in 2020 and have powered 45% of the S&P 500’s total return, which reflects price changes and dividend payments, according to S&P Dow Jones Indices.
Even through periods of turmoil, investors have stuck with growth stocks. Markets have been rattled even before the coronavirus outbreak, which has sickened tens of thousands of people around the world and crimped business activity. The slowdown pushed oil prices into a bear market and drove investors to traditionally safer bets like U.S. Treasurys. Before that, there were tensions between the U.S. and Iran.
Investors appear confident growth stocks can survive these challenges. Many are eager to hold on to stocks they view as enduring winners of a period of technology disruption. And despite their dramatic rally, valuations among tech giants aren’t approaching the levels seen during the dot-com bubble.
The big tech companies, which have become nearly synonymous with growth in recent years, have continued to stand out. The S&P 500’s tech sector is up 11% this year, leading the way as it has for much of the decadelong bull run.