By Amrith Ramkumar
Technology companies are set to end the year with their greatest
share of the stock market ever, topping a dot-com era peak in the
latest illustration of their growing influence on global
Companies that do everything from manufacturing phones to
operating social-media platforms now account for nearly 40% of the
S&P 500, on pace to eclipse a record of 37% from 1999,
according to a Dow Jones Market Data analysis of annual
market-value data going back 30 years. Apple Inc., which became the
first U.S. company to hit a $2 trillion market capitalization
earlier this year, accounts for more than 7% of the index on its
own. Early last month, it accounted for 8% of the S&P, the
largest share ever for any stock in data going back to 1998.
Despite a recent pullback in popular tech stocks like Apple and
Netflix Inc., many of these companies still number among the
market's leaders for 2020, powering the S&P 500 to a nearly 8%
gain for the year and keeping it near all-time highs during the
coronavirus-induced economic slowdown. Tech stocks lifted markets
early last week before dragging them down later in the week,
highlighting their sway over the major stock indexes.
Trends like remote work and cloud computing are driving growth
at these firms, helping tech companies expand their businesses at a
time when many are struggling. Yet the concentration of gains in a
narrow group of companies concerns many investors, who worry that
stocks are too dependent on the sector and that a significant
pullback in a few names could bring down markets.
Previous peaks in a sector's influence over the S&P 500 have
preceded selloffs. The tech sector tumbled after the dot-com bubble
burst. Banks' influence over markets peaked in 2006 ahead of the
financial crisis, and energy stocks slid after hitting a new high
in their share of the index in 2008.
Few analysts say tech stocks are as overvalued as they were two
decades ago, with sturdy earnings growth and near-zero interest
rates justifying much of the group's recent ascent. But many
investors are bracing for more volatility in a sector that has
risen remarkably quickly and pulled the rest of the market along
"We've had a mandated digital lifestyle," said Alison Porter, a
portfolio manager focused on the sector at Janus Henderson
Investors. She remains confident in the biggest technology
companies because of their reliable growth and prominence with
people staying home during the pandemic.
Investors this week will monitor the next round of third-quarter
earnings from companies including Netflix, as well as the latest
figures on weekly jobless claims to gauge the health of the
Because Congress hasn't passed additional stimulus measures,
many traders remain hesitant to favor parts of the market that are
more directly tied to economic growth. That also held true
throughout the slow but sturdy expansion that ended earlier this
year. While data show the tech giants employ fewer workers than
some other previous market leaders, they do invest heavily in their
businesses and allow other firms and consumers to buy and sell
goods and services more efficiently.
Howard Marks, co-founder of investment giant Oaktree Capital
Group LLC, said in a recent memo to clients that measures of how
expensive tech stocks are relative to current profits could
actually understate the potential of these companies because they
spend so much to drive their rapid growth.
Analysts estimate the tech sector's share of S&P 500
corporate profits could reach about 36% this year, FactSet data
show. The information technology sector has a price/earnings ratio
of 28 based on the group's profits from the past year, compared
with a ratio of 24 for the S&P 500. Communication-services
firms trade at 25 times earnings, while Apple, Microsoft Corp.,
Facebook Inc. and Alphabet Inc. have valuations in the mid-30s.
Netflix's ratio is about 90, while Amazon.com Inc.'s is roughly
Even for more expensive internet companies, many investors are
willing to pay for their rapid growth.
"They have received an added boost over the last 10 years
because the broad economic backdrop has been lackluster," said
David Lebovitz, a global market strategist at J.P. Morgan Asset
Management. He is recommending clients favor companies within the
sector that aren't as expensive as the most popular internet
At the same time, frenzied trading in the most popular internet
companies remains a concern for many market watchers. Some of that
activity has taken place in options tied to tech stocks. Options
grant the holder the choice to buy or sell a stock at a certain
price by a specified date. Banks and other firms that sell options
to investors often then hedge against prices going up or down by
trading tech investments themselves, a force that can exacerbate
volatility. Japanese conglomerate SoftBank Group Corp. was a big
buyer of tech-stock options earlier this year.
The analysis of tech's concentration in the S&P 500 is based
on companies in the information technology and
communication-services sectors. Notably, that group excludes
Amazon, the e-commerce giant that is in the consumer discretionary
sector. Including Amazon, which has a market value around $1.6
trillion, would make the tech sector's sway over markets even
Because the S&P 500 is weighted by a company's market value,
the biggest internet firms have overshadowed declines in several
sectors this year. In another illustration of the group's strength
during the pandemic, the S&P is outpacing a version of the
index that gives every stock an equal weighting by nearly 10
percentage points this year, a gap that would be the highest since
the late 1990s.
"The longer this backdrop continues, the further they're going
to pull away from the pack," said Amanda Agati, chief investment
strategist at PNC Financial Services Group, which is favoring
companies more tied to remote work and learning recently like
technology, health-care and consumer-staples firms.
Amazon and other large internet companies have come under
increasing regulatory scrutiny in recent weeks, with a
Democratic-led House of Representatives panel recently finding that
Congress should consider forcing the tech giants to separate their
dominant online platforms from other business lines.
Few analysts expect the biggest tech firms to soon be broken up
and regulatory actions are often slow to play out, but many
investors think regulation could be another source of volatility in
the weeks ahead.
"The only thing that really makes me nervous as a tech bull is
the likelihood of government intervention," said Jacob Walthour,
CEO of Blueprint Capital Advisors. Still, he recommends clients
favor technology stocks, e-commerce companies like Amazon and
electric auto maker Tesla Inc. because of their growth
Write to Amrith Ramkumar at email@example.com
(END) Dow Jones Newswires
October 16, 2020 20:41 ET (00:41 GMT)
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