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An employee works at Shopify's headquarters in Ottawa on Oct. 22, 2018.Chris Wattie/Reuters

Tech stocks performed brilliantly during last year’s bad times. The question now is how they will stand up to this year’s good times.

Paradoxically, the brightening economic picture is dimming the allure of high-tech superstars, such as Inc., Facebook Inc. and Apple Inc.

Their stocks served as beacons during the pandemic because they offered a rare combination of growth and stability. But now, as the global outlook improves, investors are backing away from tech in favour of betting on cyclical stocks that stand to benefit more from a broad economic recovery.

One sign of the market’s change of heart is the wide gap that has opened up in recent weeks between indexes of growth stocks and value stocks. Tech companies tend to dominate the growth indexes, which track companies with rapidly rising sales and earnings. Value stocks, in contrast, are more humdrum businesses trading at low prices compared with what is on their balance sheet.

U.S. growth stocks have enjoyed a sizzling few years, but so far in 2021, the Russell 1000 Growth Index has gained only 0.7 per cent. It has lagged far behind the Russell 1000 Value Index, which has climbed 11.5 per cent.

“We think that value will continue to outperform growth in the U.S., and potentially by a significant margin,” Oliver Allen, markets economist at Capital Economics, wrote in a note Friday.

A similar rotation from growth to value seems to be playing out in Canada, too. In 2020, the S&P/TSX Capped Information Technology Index soared 54 per cent, while the Capped Financials Index struggled to produce a meagre 1-per-cent return.

Those trends have flipped so far this year. Boring old Royal Bank of Canada has gained 11 per cent, while Ottawa-based Shopify Inc., last year’s online darling, is up 0.6 per cent.

Many factors are helping to drive such market reversals. One is the dawning recognition that tech stocks are no longer the only show in town.

Technology was one of the few industries to benefit from last year’s locked-down conditions because of the mass movement of business online. Now, as the recovery broadens, many other sectors are enjoying a strong rebound in sales and profits. Growth is no longer scarce and investors should no longer pay a premium for it, Mr. Allen argues.

Rising bond yields pose another challenge for tech stocks.

When yields are near zero, as they were last year, investors are giving up little in the way of guaranteed payoff if they choose to take their chances and invest instead in growth stocks and other speculative bets. However, as yields rise, bonds become more tempting – especially when stacked up against early-stage growth stocks with profits and dividends that still lie far in the future.

Even a small increase in bond yields has the potential to deliver a wallop to growth stocks when share valuations are as elevated as they are now. The yield on the benchmark 10-year U.S. Treasury bond has already surged from 0.93 per cent to 1.63 per cent this year. If the yield on the 10-year Treasury were to tick up only slightly more, to 2 per cent, the tech-focused Nasdaq-100 Index could tumble 20 per cent from its peak, according to Joe Kalish, chief global macro strategist at Ned Davis Research.

To be sure, not everyone agrees with this dire assessment. Dan Ives of Wedbush Securities remains a staunch fan of tech stocks such as DocuSign Inc., Microsoft Corp. and Inc. because he believes the digital transformation of the economy is just starting.

A tiny flicker in the 10-year bond yield “does not change this dynamic,” he wrote in a note this past week. He argued that the recent weakness in tech has created a “golden opportunity” for investors to load up on the best names in the sector.

Skeptics aren’t convinced, though. They point out that tech now faces long-term structural challenges – including growing concern that the biggest tech companies are creating multiple problems, from the spread of fake news to monopolistic behaviour, that demand regulatory action.

The showdown between big tech and its critics is taking place on multiple fronts.

In Alabama, Amazon is fighting to turn back a unionization drive that, if successful, could force the giant retailer to overhaul its famously union-averse ways.

In Washington, Facebook is facing an antitrust suit, filed by the U.S. Federal Trade Commission and 46 states, which alleges the social-media company unlawfully preserved its monopoly status by acquiring potential competitors.

Meanwhile, the Biden administration has recruited two noted tech critics, Lina Khan and Tim Wu, to help shape its broader antitrust agenda. Over in Europe, regulators have proposed broad measures to rein in the tech giants, including rules that would make online platforms more responsible for information posted on them.

How successful such measures will be is open to question, but tech investors can’t afford to ignore them. Combined with a broadening recovery and rising bond yields, the growing political backlash adds to the headwinds facing the tech sector.

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