© Reuters. FILE PHOTO: The logos of Amazon, Apple, Facebook and Google
By John McRank
NEW YORK (Reuters) – As the tech rally puts US stock indices at a staggering distance from fresh records, fears that big names are over-expanded and new regulation could emerge will lead to investors diversifying beyond rally leaders.
The five largest companies of the S&P 500, Apple Inc (O :), Microsoft Corp (O :), Amazon.com Inc (O :), Alphabet Inc (O 🙂 and Facebook Inc. (O 🙂 now account for 28% of the index̵
On average, these technology and Internet stocks have gained 49.23% this year, compared to a 7% profit for the S&P 500 – and have grown by an average of 9.6% since September 21, compared to 6.6% for the S&P 500. to report strong third-quarter revenue in the coming weeks, proving their state in a year when the coronavirus pandemic fueled the home-based economy while devastating companies related to sectors such as travel, restaurants and fossil fuels.
(Graphics: The big technological boost of S&P 500 https://tmsnrt.rs/2SUGbw3)
However, some worry that mega-capital technology companies are exposed to factors that could reduce their fascination in the coming months. Being a long technology is the most crowded trade of all time, according to a recent study by the fund manager of Bank of America (NYSE :).
“It’s all about trying not to keep all your eggs in one basket,” said Laura Kane, head of thematic investment for America at UBS Global Wealth Management. “It’s about cutting out certain exposures and turning to something else.”
UBS analysts have recommended diversifying mega-cap technology stocks on the grounds of economic recovery and rising estimates. They are pushing for a rebalancing in US semiconductors, which are more sensitive to economic recovery, as well as emerging market stocks and UK-based stocks.
Analysts at Societe Generale (OTC 🙂 also recently cited a challenging regulatory environment as one of the reasons for the diversification of US technology stocks, Asian and European stocks.
Regulatory concerns intensified after an acute report https://www.reuters.com/article/us-usa-tech-biden-analysis/scathing-congressional-report-suggests-big-trouble-for-big-tech-if- biden -wins-idUSKBN26S32A details the abuses of market power by Google, Apple, Amazon and Facebook, published earlier this month by the Antitrust Committee of the Judicial Commission of the House of Commons. The report fears that strict new rules and stricter enforcement of large technology companies will follow if Democratic presidential candidate Joe Biden wins the White House.
A potential breakthrough in the demand for a vaccine against COVID-19 could also stimulate the betting of economically sensitive stocks and cyclical stocks, which could benefit from a stronger economic recovery, which would potentially reduce the attractiveness of the technology, say analysts at Soc Gen .
The average 12-month forward price-earnings ratio for the big 5 technology stocks is 31, while the S&P 500 is trading at a 12-month forward PE ratio of 22, according to Refinitiv. Yet they are not as extended as in the dotcom period, with overall profitability, dividends and balance sheet strength in much better shape than 20 years ago.
Investor companies will monitor next week as they report third-quarter results, including Netflix Inc (O 🙂 on Tuesday, Tesla Inc (O 🙂 and Verizon Communication Inc (N 🙂 on Wednesday, and Intel Corp. (O 🙂 on Thursday. Apple, Amazon, Alphabet, Microsoft and Facebook report next week.
Many investors still see the big technology names with their strong balance sheets and financial results as shelters such as the coronavirus continue to climb and the economy struggles with a lack of new fiscal stimulus.
“These companies provide powerful profits,” said Jack Ablin, chief investment officer at Cresset Wealth Advisors. “People have to keep in mind that the five biggest technology companies make more than the whole amount, so it’s not the internet bubble.”
It might be a good idea to reduce some technology exposure if the position is too weighted, but profits in the sector are largely based on fundamentals, said Michael Farr, president of Farr, Miller & Washington LLC.
Turning away from technology for big profits and some instability lately would be a “fool’s trade,” he added. “The reports of their deaths were greatly exaggerated,” he said of the major technology stocks.