Is lockdown’s tech bubble about to burst?

Netflix is not signing up subscribers at the rate it once did. Disney+ has stalled. At Boohoo, growth is not as red hot as it was just a few months ago, while Deliveroo’s float on the London stock market was quickly dubbed ‘flopperoo’ by City wags. Zoom’s shares price has stopped, er, zooming, at least in the upward direction.

A random collection of snippets of business news? Well, to some degree. But there is also a common theme to all these stories, and one that is significant for investors. We are about to witness a serious bout of what might be termed the post-pandemic blues. The companies that did brilliantly while the world locked down are going to see a significant slowdown as it opens up again. And since those are the same businesses that have driven the equity indices to all-time highs, the entire market will suffer as well. True, those tech stars will still dominate the 21st century but there will be a sharp downturn first.

We are familiar with how a handful of web-based companies advanced rapidly while we were locked down for much of the past year. No one had really heard of Zoom until we all suddenly had to work from home, but its user numbers exploded and its share price rose eight-fold as the Covid-19 pandemic spread — taking its market value to well above $100 billion. Netflix signed up new viewers in record numbers as we all whiled away the evenings watching Emily in Paris and Bridgerton: another 37 million joined in 2020, its best year on record. Other streaming services smashed all expectations.

Meanwhile, every kind of online shopping site boomed, with the proportion of retail sales on the internet in the UK climbing to 36 per cent in January, an advance of more than ten percentage points in under a year. At the same time, whole new industries emerged. To take just one example, by the end of 2020, the market for online concerts, an industry that barely existed before the pandemic, was worth more than $500 million globally. In sector after sector Covid-19 accelerated technology by a decade. If your business revolved around a website or an app, it was boom time, and that was reflected in the stock market: the tech-based Nasdaq hit record highs, breaking through 14,000 this month, more than double its level when the epidemic began.

Here’s the catch, however. As the epidemic fades, and as we come slowly out of lockdown, a lot of that is stalling. Netflix signed up fewer than four million subscribers in the first quarter of this year compared with almost 16 million at the peak of last; given the expectations around the company, that counted as a disappointment. Disney+ smashed past 100 million subscribers last year but growth has slowed sharply since then. Zoom’s share price is down by a third in the past six months as online meeting fatigue sets in. Deliveroo’s shares are struggling as people realise restaurants are open again. Online sales have dropped sharply, and it is the high street and shopping malls that are booming again: Boohoo last month warned of an inevitable slowdown in its stellar growth. Economies are opening up and people are spending a lot of the money that was stored up in their accounts while there was nothing very much to do. Now that they can go out again, even if some restrictions remain in place for another month in the UK, they are understandably swapping screen time for face time.

Of course, that is great for many businesses. So long as lockdown is steadily lifted, retailers, bars and restaurants, gym chains, hoteliers and airlines, the sectors worst hit by restrictions, will all witness a steady recovery. By contrast, for the stars of the tech industry it will suddenly become a lot tougher. The lockdown break-out businesses will struggle.

In truth, that will mainly be a temporary phenomenon. The big winners of last year will also be the big winners of the coming two decades. The global economy is still going to shift online. Boohoo is not suddenly about to be outclassed by M&S, nor will ITV ever overtake Netflix, and, while we will steadily drift back to the office, working from home will become far more normal than it ever was in the past, and all the companies selling snazzy software to make that possible will have a healthy future. And yet the rest of 2021 will be tough. Quarterly growth reports will be disappointing. Earnings won’t rise at the same rate they were a year ago. And share prices, always far more affected by the next year than the last one, will start to suffer.

That matters for the wider stock market. Over the past year, technology has come to dominate every major index to an unprecedented extent. On the S&P 500, the key global index, the five biggest companies — Apple, Amazon, Facebook, Microsoft and Google — now account for 27 per cent of the entire value of the entire index compared with less than 20 per cent before the pandemic started. That is even more true of the tech-heavy Nasdaq, and of the increasingly important Shanghai index as well. Even the FTSE 100, which has suffered from having hardly any technology businesses, saw some uptick: Ocado’s share almost doubled during the first phase of lockdown, and it is now worth three times as much as Sainsbury’s.

The important point is this: the rally in equity prices that paradoxically turned Covid-19 into an epic bull market was mostly driven by a few tech stocks. As they suffer from a bout of the post-pandemic blues, which they inevitably will, the entire market will suffer as well. There may not be a full-scale crash. But there will certainly be a correction because opening up the economy again and getting back to a more normal life will be bad for what are now the market’s leading companies.