Tech-fuelled 'everything's awesome' rally looks unstoppable

Today's $72 trillion question for investors: To buy or not to buy into the global equities rally? Notwithstanding inflated share prices, politics and the pandemic, the answer from many is a resounding "yes."

That's not just because unprecedented stimulus - $20 trillion and counting - is forcing a structural change in how financial assets are valued. It's also down to years of societal shifts, innovation and now, the pandemic, which could transform forever the way people work, study and shop - playing into the dominant hand of tech stocks.

So while renewed coronavirus outbreaks and looming U.S. elections have made some investors cautious, many equity bulls are hanging in there, having already boosted the value of stocks globally by $24 trillion since end-March. As global equities near record highs, strategists say the quickfire bear-to-bull switch was not only justified but deserves to go further.

"The COVID pandemic has taken existing trends - greater dependency on tech, online shopping, remote working, etc. - and supercharged them," said Benjamin Jones, a senior multi-asset strategist at State Street Global Markets.

With technology stocks holding on to their eye-popping gains, investors say the next leg of the rally is likely to come from value stocks - so called because they trade at cheaper valuations than their growth-oriented peers.

Stocks are benefiting of course from above-average equity-risk premiums, the return one can earn by holding stocks compared with risk- free assets. Global stocks carry an ERP of 4.6%, while for U.S. stocks, it's at 4%.

That might erode over time, but for now interest rates appear firmly stapled to the floor. As for valuations, they are hovering near 22 times forward earnings for the U.S. S&P 500 index .SPX, the highest since the dotcom bubble in early 2000. But then, the index too has changed dramatically with technology by far its biggest sector component.

Making up around a third of the benchmark index, they are the ultimate pandemic stay-at-home beneficiaries, especially those known as FANGMAN - an expanded tech group comprising Facebook, Apple, Netflix, Google, Microsoft, Amazon and chipmaker Nvidia.

Their multiples of 80-100 times forward earnings have led the broader market higher. Until a few decades ago, bank, oil & gas, and industrial stocks made up a bulk of the S&P 500. These sectors typically trade at lower multiples, given commodity price volatility and high capex needs - a major reason behind this year's underperformance of Britain's FTSE benchmark.