El-Erian: Stocks are unlikely to revisit March lows

New York (CNN Business)Two trillion dollars is a lotta money — government stimulus and budget deficit kind of money. But three American tech companies each could soon be valued at that 13-digit amount.

Apple (AAPL) and Microsoft (MSFT) are each worth more than $1.6 trillion today. Amazon (AMZN) has a market capitalization above $1.5 trillion. They are all trading near record highs, and each is about 20% to 25% below a $2 trillion market cap. All could all hit the $2 trillion threshold within the next year or two if they keep posting solid results.
Wall Street is clearly a fan of Apple CEO Tim Cook, Microsoft’s Satya Nadella and world’s richest man, Jeff Bezos of Amazon. These companies helped propel the Nasdaq to an all-time high above 10,000 on June 9 despite concerns about Covid-19.

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    Apple is minting money from iPhone sales, and its services unit, the division that includes Apple Pay, Apple Music and the App Store, is rapidly growing.
    Microsoft is generating strong sales and profit from its Office 365 subscription suite of software, while Amazon is delivering more goods than ever to Prime subscribers and other consumers stuck at home during the pandemic.

    Both Microsoft and Amazon also are leaders in the lucrative cloud computing market with their highly profitable Azure and AWS businesses.

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    “When growth is scarce, people pay more for growth,” said Don Townswick, director of equity strategies at Conning. “This is an environment where there has been little growth for years — more or less since the 2008 financial crisis.”
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    Wall Street analysts remain almost universally bullish on the tech trio, too.
    Twenty-nine out of 39 analysts who cover Apple have a “buy” recommendation on it, according to data from Refinitiv. Meanwhile, 34 of the 37 analysts following Microsoft label it a “buy” and 48 of the 51 analysts covering Amazon rate it a “buy.”

    Time for Apple, Microsoft and Amazon to take a breather?

    But look deeper, and fears begin to emerge about the three stocks: Some believe they have run too far, too fast.
    Apple and Microsoft have each soared more than 30% in 2020, making them top performers in the Dow. Amazon is one of the best stocks in the S&P 500, surging nearly 70% year-to-date. Despite the bullish ratings from analysts, the consensus price targets for all three stocks are lower than their current prices.
    Each of the three companies is strong and appears to be recession-resistant. But valuations are a concern, said Northern Trust Wealth Management chief investment officer Katie Nixon, in a report this week.
    “These are great companies, but price matters in the long run. The stocks that dominate the Nasdaq are expensive,” Nixon wrote, pointing out that Microsoft and Apple each trade at more than 25 earnings estimates for next year while Amazon is valued at a “whopping” 60 times forecasts.
    “These are elevated valuations that leave little room for error, which could represent a headwind for future outperformance,” she said.

      Townswick also points out that the three tech titans face even more pressure to post healthy results, especially if the economy bounces back next year. After all, if Apple, Microsoft and Amazon can thrive during a downturn, shouldn’t they do even better in a rebound?
      “There could be danger if one of these highfliers disappoints,” Townswick said. “You live by the sword and die by the sword and will have to keep delivering when things to return to normal.”
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