Warren buffet expressed regret over the weekend that he passed over Amazon and Google-parent Alphabet several years ago. The US tech sector in the meantime has turned into a group of monopolized utilities that make their money by charging a toll for advertising, Internet purchases, software licenses and so forth. This is evident in the accompanying chart that compares the implied volatility of options on the consumer staples and technology SPDR ETF’s to the implied volatility of the overall market, that is, the VIX Index.
The tech sector now trades more like detergent and soup companies than it trades like the overall market. Tech is supposed to be inherently volatile, given the unpredictable changes in the underlying technology. But the market is treating the tech sector as if it were as predictable as detergent. That is a radical change; before 2006, the S&P tech sector used to trade with roughly double the volatility of the S&P.
This tells us that technological change in the US is in stasis: Google’s monopoly on search engines, Amazon’s monopoly on Internet sales, Facebook’s monopoly on targeted advertising, Microsoft’s monopoly on PC software and so forth have given these companies the performance characteristics of public utilities.
If they aren’t volatile, they don’t have a lot of upside. And if the tech sector doesn’t offer upside, where is the upside supposed to come from? The utility-like profile of the tech sector makes high valuations easier to understand, but it also suggests that the big gains in US stock valuations are behind us.