Are Tech Stocks Immune to Recession?

By Charlie Bilello

23 Jun 2020

In 2000, the dot-com bubble began to burst. Tech stocks finished the year down 42%.

(note: using S&P 500 technology sector ETF ($XLK) as a proxy for the tech sector.)

Charts via YCharts

In 2001, the recession officially began, and tech stocks finished down 23%.

In 2002, the carnage finally ended, but not before another 38% decline.

The next recession began in 2008. Tech stocks would finish the year down 41%, their largest decline since 2000.

The “great recession” ended in June 2009, and the longest expansion in US history would follow.

Which brings us to today. The current recession that began in March is estimated by many to be the deepest since the Great Depression.

And how are tech stocks faring?

Like the recession never happened. They are currently at all-time highs, up 15-17% year-to-date.

Note: Nasdaq 100 (QQQ) and S&P 500 tech sector ETF.

How is that possible?

Many are saying it’s because this time is different – the current recession is unlike any we have ever seen before.

With the government mandating businesses to shut down, schools to close and paying people to stay home, many technology companies benefited as their products instantly became more valuable and essential…

  • Can’t go to the store? Buy more online (Amazon, eBay, Etsy, Shopify).
  • Can’t leave your house? Order a new streaming service (Netflix, Amazon Prime Video, Apple TV+).
  • Can’t go to the gym? Exercise at home (Peloton).
  • Can’t go to the office? Use video conferencing (Zoom, Google Hangouts/Meet, Skype (Microsoft), Slack).
  • Can’t meet up with friends/family in person? Spend more time on social media (Facebook, Snapchat, Twitter, Tencent, Spotify).

From the cloud (Amazon AWS, Microsoft Azure, Google Cloud, Oracle, Salesforce) to the classroom (Google Search/Classroom, Canvas, Chegg, etc.), there seem to be countless examples of technology companies providing solutions to the stay-at-home economy. In almost all cases, these were secular trends in place at the start of 2020 that only accelerated with the advent of COVID-19.

So are tech stocks immune to recession?

The 2000-02 and 2008 examples seem to suggest otherwise, but a stay-at-home recession caused by a pandemic appears to be a different animal.

That is, at least in terms of storytelling and stock prices.

If we look at the actual GAAP earnings for the S&P 500 Tech sector, we find a decline of 10% in the first quarter versus the prior year (data via S&P Dow Jones). This was considerably better than the S&P 500 as a whole (-66% YoY), but still down nonetheless.

Second quarter earnings are expected to be lower once again, calling into question the notion of total immunity.

But the story remains in tact (“this recession is bullish for tech”), and the market is nothing more than a real-time reflection of the belief investors have in a story.

Tech stocks today are pricing in a fairy-tale outcome: a v-shaped recovery with no impact whatsoever from the deepest economic contraction and highest unemployment the world has seen since the Depression.

Will this fairy tale come true, or will there be a plot twist at the end?

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