The outlook for Tech investors is remains a grim one and buying the dip, with the underlying assumption that Tech is on sale could prove to be hazardous.

A visual to ponder from Liz Ann Sonders @ Charles Schwab – “No two bear markets are identical, but interesting to compare current one (orange) to that associated with tech bust in early 2000s (blue) … both indexed to 100 at respective peaks.”

I have said on many past communications “the playbook of the last decade is broken” and this post is meant to illustrate some of the specifics of the fundamental shifts currently underway.

Clients and regular readers are well aware of my views on the energy sector – specifically, how capital investment in carbon based energy has been woefully inadequate for so long now that it is beginning to lead to significant issues on the supply side. At the same time, demand will almost certainly set new records in 2023 (regardless of U.S. recession) and will only continue to grow for the foreseeable future.

Now for the other side of the coin – a subject that’s equally (perhaps even more) important to understand. Unfortunately, even after the warning shots fired in 2022, investors remain heavily exposed to technology. In fact, aggregate investor exposure to the sector increased in 2022. What’s of note is that insiders have been using the incoming fund flows to liquidate their own positions.

So what is it that insiders see that individual investors are missing? The charts above offer a clue. The last time technology became so heavily over-weighted within the broad stock market was at the height of the ‘.com’ madness.

The demand for tech products and services associated with the 2020 lockdowns, coupled with unprecedented government stimulus was the fuel that fed the ultimate blow off top for the sector. That level of demand was of course not sustainable and now we’re seeing those trends sharply reverse. Ask yourself, if you bought a new laptop, a tablet, webcam, printer, monitor, a Peloton, etc., in 2020 – how likely are you to upgrade or replace those purchases in 2022, or 2023…?

As Microsoft CEO, Satya Nadella, told Davos attendees last week, “We are going to go through a phase today where there is going to be a normalization of demand. We in the tech industry will have to get more efficient–it’s not about everyone else doing more with less, we will have to do more with less.”

Furthermore, Bloomberg noted, “The tech industry in 2022 increased its announced job cuts by 649%, with the total of 97,171 amounting to the highest since the dot-com crash more than 20 years ago.”

The ‘.com’ bust in the early 2000’s saw a scarcity of capital investment as demand lagged far behind utopian projections. Interestingly, in 2022, tech sector capital investment was still growing. Business executes lay off staff when business slows and outlooks dim – why would they otherwise? Especially in such a tight labor market! Tech sector capital investment will likely follow suit. Conclusion – earnings are coming down…

Some will counter that these are just short-term challenges, however I would argue that these are, in fact, just symptoms of a much bigger issue. The Financial Times captured the notion when they said “Leading companies’ latest earnings suggest expansionist era might be approaching its end” and that ‘weakening of the secular growth drivers that have supported Big Tech’s rise over the past two decades… have come to an end.’

It’s fairly clear to me that the next decade for these companies will look very different than the past decade.