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This week should be cause for celebration among investors, as the FTSE 100 just touched a new all-time high of 10,750. Yet many could be feeling a little glum. Why? Because US tech stocks are plunging, causing pain elsewhere in our portfolios.
The excitement surrounding Space Exploration Technologies Corporation, or SpaceX, since its June stock market debut has long faded. The shares opened at $135 and surged to $225 within days. Today they’re on sale at $112. They’ve almost halved from their peak, and they’re not the only big tech casualty.
The sector is selling off as investors wonder whether valuations have become too stretched. Especially as nobody yet knows whether artificial intelligence hyperscalers will generate decent returns on the hundreds of billions they’re pouring into infrastructure.
Why are tech stocks falling?
That’s not the only concern. The Iran war is heating up again, oil prices are rising, and inflation could follow. That makes investors wary of growth shares, because higher inflation makes borrowing more expensive and erodes the value of their future earnings.
Instead, investors are retreating to the relative safety of the FTSE 100, including many who had dismissed UK blue chips as boring. Who needed dreary old banks, insurers, miners, oil giants, and pharmaceutical companies when Elon Musk was aiming for Mars? It turns out plenty of people do. These companies make money today and pay some of the world’s most generous dividends.
I’ve been positioning my Self-Invested Personal Pension for a FTSE 100 revival for the last three years, so I’m feeling vindicated today. The index has climbed 19.85% over the last year, with a dividend yield of around 3.2% on top.
By comparison, the S&P 500 is up 14.98%, with a yield of roughly 1.1%. I’m not shunning US shares. The UK won’t always outperform. Diversification remains vital. But too many British investors have scorned the UK, and in my view, they should think again.
Can Rolls-Royce shares keep climbing?
I buy individual shares rather than trackers, and I’m sitting on some juicy winners, led by FTSE 100 super-hero Rolls-Royce (LSE: RR). Its share price has soared an astonishing 1,160% over five years and, while the growth trajectory is inevitably slowing, it still packs a punch.
The shares jumped another 4% this morning (30 July) after half-year results beat expectations. Revenues rose 26% to £11.3bn on an organic basis, fuelled by strong growth across the group’s Civil Aerospace, Defence, and Power Systems.
Underlying operating profit climbed 46% to £2.5bin, smashing forecasts, while the interim dividend was lifted 33% to 6p a share. Rolls-Royce has completed £1.4bn of its planned share buyback programme, which will total between £7bn and £9bn.
Rolls-Royce trades on a price-to-earnings ratio of almost 47, so it has to keep beating high expectations. A downturn in air travel, higher oil prices, or weaker economic growth could hit flying hours and its lucrative aircraft engine servicing revenues. Big new opportunities such as smaller modular reactor ‘mini-nukes’ and building engines for narrow body aircraft carry massive execution risk.
Investors may prefer to hunt for a FTSE 100 recovery story that hasn’t already soared. Yet, I still think Rolls-Royce is worth considering today. It’s also a brilliant reminder that Britain’s supposedly boring stock market still packs a punch.
Should you invest £5,000 in Rolls-Royce Plc right now?
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Harvey Jones owns shares in Rolls-Royce.
This story originally appeared on Motley Fool
