© Reuters. FILE PHOTO: The logos of Amazon, Apple, Facebook and Google
By John McCrank
NEW YORK (Reuters) – As a technology-driven rally brings U.S. stock indices within a striking distance of fresh records, concerns that big names have been greatly expanded and that new adjustments could have some investors who differ despite the rally leaders.
The five largest companies of the S&P 500, Apple Inc (O :), Microsoft Corp. (O :), Amazon.com Inc (O :), Alphabet Inc (O 🙂 at Facebook Inc. (Or 🙂 now accounts for 28% of the index weighting and is responsible for 25% of its earnings, Goldman Sachs (NYSE 🙂 said earlier this month.
On average, these tech and driven Internet stocks gained 49.23% this year, compared to a 7% gain for the S&P 500 ̵1; and up 9.6% on average since September 21, compared to 6.6% for the S&P 500. They are expected to report strong earnings in the third quarter of the coming weeks, proving their strength within a year when the pandemic coronavirus started an economic working while devastating companies are associated with sectors such as travel, restaurants, and fossil fuel.
(Graphic: The big tech boost of the S&P 500 https://tmsnrt.rs/2SUGbw3)
Some, however, are concerned that mega-cap tech companies are exposed to factors that could disrupt their craze in the coming months. Being a long-term technology is the tightest commodity of all time, according to a recent Bank of America (NYSE 🙂 fund manager survey.
“It’s all about trying not to have all your eggs in one basket,” said Laura Kane, America’s leader in thematic investing in UBS Global Wealth Management. “It’s about cutting off some exposure and rotating on others.”
UBS analysts recommend diversifying mega-cap tech stocks on the signs of an economic recovery and rising values. They are urging a rebalancing of US semiconductors, which are more sensitive to economic recovery, as well as emerging market stock values and UK-based equities.
The Societe Generale (OTC 🙂 analysts also recently cited a challenging regulatory environment as a reason to diversify US tech shares and Asian and European stocks.
Control concerns rose following an annoying report https://www.reuters.com/article/us-usa-tech-biden-analysis/scathing-congressional-report-suggests-big-trouble-for-big -tech-if- biden-wins-idUSKBN26S32Details abuses of market power by Google, Apple, Amazon and Facebook issued earlier this month by the antitrust panel of the US House Judiciary Committee. The report raises concerns that tough new policies and strict enforcement for big tech companies will follow if Democratic presidential candidate Joe Biden wins the White House.
A potential success in the search for a COVID-19 vaccine could also spur economic-sensitive value-sharing stakes and cyclical stocks that could benefit from a stronger economic recovery, which tech appeal may be blurred, Soc Gen. analysts say.
The median 12-month forward price-to-earnings ratio for Big 5 tech stocks is 31, while the S&P 500 is trading at a 12-month forward pe ratio of 22, according to Refinitiv. However, they are not as expandable as during the dotcom era, with overall profitability, dividends and balance strength in better shape than 20 years ago.
Investors in the company will be watching next week as they report third-quarter results including Netflix Inc (O 🙂 on Tuesday, Tesla Inc (O 🙂 and Verizon Communication Inc (N 🙂 on Wednesday, at Intel Corp. (Or 🙂 on Thursday. Apple, Amazon, Alphabet, Microsoft and Facebook are reporting next week.
Many investors still see big tech names, along with their solid balance sheets and financial results, as shelters as coronavirus cases continue to rise and the economy struggles with a lack of new fiscal stimulus.
“These companies deliver strong profits,” said Jack Ablin, chief investment officer at Cresset Wealth Advisors. “People should keep in mind that the five biggest tech companies are earning more revenue than the whole combined, so this is not the bubble on the internet.”
It may be a good idea to trim some technology exposure if the position is overweight, but sector gains are more driven by the basics, said Michael Farr, president of Farr, Miller & Washington LLC.
To spin outside of tech due to huge gains and some recent volatility would be “a commodity of suckers,” he added. “Reports of their deaths have been greatly exaggerated,” he said of large tech stocks.