Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Today’s the big day for Apple fans, with the company unveiling its new iPhone 12 at a launch event being broadcast this evening from its California campus. The launch marks the first time the tech giant has released a major new product in over two years (besides a £5-a-month gaming service and Apple TV).

Not that investors have minded. In August this year, Apple became the first company in the US to achieve a two trillion-dollar valuation on the stock market. In the absence of any major releases, that’s a staggering achievement.

It’s made all the more remarkable given that it was only two years ago that Apple hit the headlines when it became the world’s first trillion-dollar company. It has taken a mere two years to go from $1 trillion to $2 trillion, yet it took 42 years for Apple Computers, as it was back then, to hit the trillion-dollar mark in August 2018.

But while many investors happily pile into the stock, others look on with concern.

Ahead of publishing our latest quarterly Investment Outlook tomorrow, we’ve asked you to submit your questions to the Outlook’s author, Tom Stevenson, who will offer his latest thinking on markets and asset classes via a webcast and podcast. If the questions we’ve received are anything to go by, it’s clear that Big Tech firms like Apple are troubling investors. And it’s not hard to see why.

Apple’s meteoric rise (it’s up about 65% since January) would feel disconcerting at the best of times - in this strangest of years, it jars glaringly with the hard times most industries have fallen on.

Much has been made of how large US tech firms like the FAANGs (Facebook, Amazon, Apple, Netflix and Alphabet, the parent company of Google) have directly profited from the pandemic, as a combination of social distancing and global lockdowns have left us more digitally dependent than ever. That’s accelerated the rise of large tech “growth” companies and prolonged the suffering of out-of-favour “value” stocks.

But, judging by your questions, that explanation isn’t quite cutting the mustard. Many of you have asked whether Big Tech firms can justify their current Price/Earnings (P/E) ratios, several of which are now well above 30x. A P/E ratio can be a helpful way to judge whether a stock is realistically valued, since it compares that stock’s value with the company’s earnings.

Apple is currently trading at around 38x earnings, a significant rise since the company hit the $1 trillion mark back in 2018 when it was trading around 18x. It’s also well above the Nasdaq 100, a US index which itself has significant exposure to technology and which is trading around 22x earnings.

To justify a price increase like that, you would expect that the stock was either undervalued in the past or looks set to grow significantly in the future.

But, in 2020, there’s another way to look at P/E ratios. While companies’ earnings have taken a battering, investors have continued to look forward to profit recoveries. That’s created an ever-widening mismatch between share prices and profits stuck at their current levels. When earnings do eventually recover, they should bring valuations back down to earth, even if share prices remain at the same levels.

All this comes as a marked contrast to the 2008 recession, when it was the cheap “value” stocks that fuelled the bounce back. This year, investors have been prepared to pay a bit more for quality “growth” companies.

Market conditions this year are also very different from those of the late 1990s, the last time we saw technology companies trading at such high valuations. The “dot.com bubble”, as it became known, saw investors pile into companies that promised to change the world, but an absence of profitability to back up those claims saw the bubble come to a devastating burst.

2020 has thrown up plenty of questions for investors, and the relentless ascendancy of Big Tech has been one of the hardest to get our heads around. FOMO (fear of missing out) has sat uncomfortably with a natural sense of suspicion over Big Tech’s spectacular growth, leaving many investors firmly in the lurch.

Tom will be answering questions like these in the October 2020 Investment Outlook report and webcast, both of which will be published on Wednesday here.

Glossary:

Price Earnings (P/E): A valuation ratio of a company's current share price compared to its per-share earnings.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics covered

Investing ideasNorth AmericaShares

Latest articles

Where next for Kingfisher shares as Screwfix-owner gives update?

Can the lockdown DIY frenzy sales boom persist in a re-opened world?


Emma-Lou Montgomery

Emma-Lou Montgomery

Fidelity International

Stop worrying about a crash: the bull market has further to run

Should investors really worry about inflation, Covid and US tapering?


Tom Stevenson

Tom Stevenson

Fidelity International

Where did UK consumers spend their money in August?

The UK ventured out last month as retail sales fell


Graham Smith

Graham Smith

Investment writer