Before the Bell Morning Market Brief August 7, 2020 FOR IMPORTANT DISCLOSURES, PLEASE SEE THE DISCLOSURE PAGES AT THE END OF THIS DOCUMENT MORNING MARKET COMMENTARY: Anthony M. Saglimbene, Global Market Strategist Quick Take: U.S. futures are pointing to a flattish open; European markets are trading mixed; Asia ended mostly lower overnight; West Texas Intermediate (WTI) oil trading up to $41.41; 10-year U.S. Treasury yield at 0.53%. Is Tech In A Bubble? Yesterday, we noted the intense focus on Big Tech this year, which has propelled Apple's stock to a weighting within the S&P 500 Index that has now surpassed IBM's record-holding size in 1985, according to Bloomberg. Currently, Apple accounts for 6.5% of the S&P 500 and roughly 12% of the NASDAQ 100 Index. However, the focus on Big Tech extends well beyond Apple, as investors have gravitated to several large, high-quality Tech companies with strong secular tailwinds all year. The broader NASDAQ Composite has outperformed the S&P 500 by +20% year-to-date on a price basis. As the FactSet chart below shows, the NASDAQ 100's outperformance has been even more pronounced over the last 12 months, causing some to ask the question: Has Tech entered a bubble? Notations: For further information on any of the topics mentioned, please contact your Financial Advisor. Unless specifically stated otherwise, comments contained in this document should not be construed as an investment opinion or recommendation of any securities mentioned. Charts depicted are from FactSet unless otherwise noted. ____________________________________________________________________________________________________________________________ © 2020 Ameriprise Financial, Inc. All rights reserved. Page 1 of 11 Before The Bell August 7, 2020 ____________________________________________________________________________________________________________________________ The BCA Research chart below shows how each decade has produced its unique financial excesses over the last 60 years. As BCA recently noted, each "bubble" consists of an extended period of easy money, a strong narrative that drives investors toward certain assets, and an extended period of outsized returns. For example, the euphoria around the "Nifty 50", represented by Disney, focused on a period of stable franchises, proven track records, and strong dividend growth. In the 1970s, commodities benefited from a plummeting U.S. dollar and rising inflation, while in the 1980s, Japan's economy experienced a massive expansion. In the 1990s, tech stocks boomed, and inflation fell, while the urbanization of China and its expanding economy during the 2000s led to increased demand for commodities. Today, Big Tech, led by companies such as Apple, Microsoft, Amazon, Facebook, Alphabet as well as their interconnected ecosystems are again fueling talk of financial excesses. But even so, we believe investors shouldn’t shy away from the group. As the second BCA Research chart below highlights, there are a couple of significant drivers to Tech's outperformance as well as its recent acceleration higher. Tech generates a superior level of free cash flow relative to most other industries, and interest rates are at historically low levels. Tech's ability to expand earnings growth through time, above and beyond most other areas across the global economy, is one of the critical narrative advantages the sector currently enjoys — even during a global pandemic. ____________________________________________________________________________________________________________________________ © 2020 Ameriprise Financial, Inc. All rights reserved. Page 2 of 11 Before The Bell August 7, 2020 ____________________________________________________________________________________________________________________________ As the last BCA Research chart above highlights, spending on Technology relative to everything else remains strong and should accelerate as businesses look to control costs, reduce cybercrime, and work-from-home trends become a more lasting fixture within the labor force. Semiconductor trends have also held up well and may benefit from increased adoption across a broader set of goods/products over time. We'll close on a few critical points to consider around the Technology sector and as you think about its place within your portfolio. Though "bubble talk" may continue to surround the industry, and as long as it remains in a leadership position, we believe investors should continue to Overweight the sector based on the following: Tech has significant exposure to high-quality companies with secular tailwinds. In a period where so much about the future is uncertain, we believe investors are best served by allocating to stable, high-quality assets, with more predictable revenue streams. Today, a large portion of these types of companies reside in the technology sector. The caveat: When/if a COVID-19 vaccine becomes available, the sector could be a source of capital for highly cyclical areas that would benefit from a more pronounced return to regular activity. Such a scenario could produce a near-to-intermediate- term headwind. With that said, longer-term trends in Tech should be unaffected by any short-term rotation, in our view. Tech is built to operate well in a deflationary environment. With interest rates low and unemployment high, Tech should continue to perform well, in our view. Growth stocks, as a whole, generally underperform during periods of higher inflation (like during brief periods in the 1990s). But since we anticipate interest rates will trace historically low levels for some time, the macro set up for the sector remains positive. ____________________________________________________________________________________________________________________________ © 2020 Ameriprise Financial, Inc. All rights reserved. Page 3 of 11 Before The Bell August 7, 2020 ____________________________________________________________________________________________________________________________ Valuations are high, but not at nosebleed levels. The trailing 12-month price-to-earnings (P/E) ratio for the S&P 500 Information Technology Index peaked at 64.3 in March 2000. Today, the trailing P/E stands at 31.2. On a trailing 12-month price-to-cashflow P/CF basis, Info Tech peaked in March 2000 at 52.5 — today, the metric stands at 21.6. Bottom line: Tech is expensive, but nowhere near the bubble days of 2000. Many investors missed Tech's run higher. Currently, more than $4.5 trillion sits in money market funds. At the end of 2018, money market assets stood closer to $3 trillion. Since 2010, the largest purchasers of stocks have been companies themselves, through share buybacks. At the same time, investors and pension funds have reduced their allocations to stocks. In a "there is no alternative," aka TINA environment, and where the narrative for Tech becomes more durable over time, we believe there is ample cash on the sidelines to fuel added gains if conditions remain healthy. Asia-Pacific: Asian equities finished mostly lower on Friday. According to Bloomberg, President Trump's Working Group on Financial Markets said Chinese listed companies on U.S. exchanges must grant American regulators access to their audit work papers. Although the U.S. Treasury Department and Securities and Exchange Commission need to determine still how to establish rules and enforce guidelines, a final penalty would include the removal of a company from U.S. exchanges. In the past, Beijing has refused to allow U.S. auditors access to companies such as Alibaba, Baidu, and other firms that trade on American exchanges. Europe: Most markets across the region are trading mixed at midday. German industrial production in June increased +8.9% m/m and better than the +7.4% increase in May. As with much of the very backward-looking data out of Germany this week, Europe's largest economy looks like it bottomed in April and gained momentum through the early part of summer as lockdown restrictions eased. U.S.: Equity futures are pointing to a flattish open. Here is a quick news rundown to start your morning: The July employment report: This morning, the July nonfarm payrolls report showed a gain of 1.76 million jobs last month, as the unemployment rate declined to 10.2% from 11.1% in June. Coming into today's jobs report, economists expected July payrolls would rise by 1.58 million. The market expected job growth had moderated last month from June levels (+4.8 million) due to a rise in COVID- 19 cases and a leveling off in high-frequency data. President Trump signs executive orders on TikTok and WeChat. As expected, the White House released a pair of executive orders prohibiting U.S. residents from doing any business with TikTok, WeChat, or any other Chinese owned apps beginning in 45 days, according to Bloomberg. The move is in line with comments from President Trump and U.S. Secretary of State Mike Pompeo over recent days. After 45 days, U.S. residents or businesses engaging in any transactions with these companies or owners face potential penalties. Coronavirus cases plateauing at elevated levels. Over the last three days, U.S. coronavirus cases have averaged roughly 50K a day, down from the 70K+ a day seen in July. Hotspot states like Arizona, California, Texas, and Florida are seeing a moderation in new cases, but absolute levels remain elevated. Embracing masks and social distancing in these states has helped to reduce transmission. However, and as we discussed in yesterday's Before the Bell, high-frequency