Big Tech's Dominance Over US Stocks Poses No Risk According To History

Financial analysts on Wall Street are expressing concerns about the growing concentration of Big Tech stocks in this year's stock-market rally. However, historical analysis suggests that there is little reason to fear. The current surge in Big Tech stocks, including Apple, Microsoft, Google parent Alphabet, Amazon, Nvidia, Tesla, and Meta Platforms (formerly Facebook), now represents 28% of the S&P 500 Index's total value, up from 20% at the beginning of the year, with a combined market capitalization of around $10 trillion. This heightened concentration raises concerns about the vulnerability of the benchmark and the assets tracking it if any of these companies were to stumble.

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Nevertheless, worries about the sustainability of such performance extremes may be premature. Bloomberg Intelligence analysis reveals that previous periods of narrow leadership, including the tech bubble in the early 2000s, have been more significant and longer-lasting. This year's surge can also be viewed as a reversal of the significant declines experienced in 2022 rather than a sign of an impending market collapse.

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Gillian Wolff, a senior associate analyst at Bloomberg Intelligence, reassures investors, stating that "this isn't something to be feared." She highlights that unlike the dot-com bubble, the outlook for most of these tech companies remains strong, although upcoming earnings reports may play a crucial role in determining their trajectory.

Historical data from Bloomberg Intelligence indicates that after the tech bubble in 1999 and the pandemic-induced market collapse in 2020, when the relative return differential between the largest stocks and the rest reached current levels, it continued to expand for several more months.

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Nancy Tengler, Chief Investment Officer of Laffer Tengler Investments, maintains an overweight position in the tech sector, although she has taken profits on certain AI stocks. She dismisses comparisons to the bursting of the internet bubble and believes that the ongoing technological advancements will support the tech sector's continued growth.

However, valuations for tech shares appear high compared to historical standards, especially considering the Federal Reserve's potential interest rate hikes. The Nasdaq 100 Index, driven by the potential of artificial intelligence, is trading at 26 times projected earnings, around 30% above its 10-year average. Despite the lofty valuations, the tech-heavy benchmark has already risen over 37% this year after experiencing a 33% decline in 2022.

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Financial experts like Eric Diton, President and Managing Director of Wealth Alliance, caution against chasing Big Tech stocks at their current levels. He advises investors to consider cheaper dividend-paying stocks that offer a steady cash stream. Diton believes that the parabolic moves seen in tech stocks have already priced in future expectations, particularly regarding artificial intelligence.

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The resilience of the tech sector's strength will face a significant test during the upcoming earnings season. Major banks are set to kick off the reporting season, followed by Big Tech companies in late July. Analysts have solid expectations for the tech giants' performance, with the top five stocks in terms of market capitalization anticipated to show a 16% profit expansion for the second quarter, while the overall S&P 500 is expected to record a profit contraction of over 8%.

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Despite concerns about concentration, the cash flow into high-performing tech stocks shows no signs of slowing down. Technology stocks attracted inflows among the S&P 500's industry sectors, with an additional $900 million in the week through July 5, according to data from EPFR Global.

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Jimmy Lee, CEO of The Wealth Consulting Group, plans to seize opportunities to buy growth stocks if there is a pullback of 5% to 10% in the benchmark index during the second half of the year. He believes that the rebound in Big Tech stocks this year is not surprising, as many of these companies did not warrant the significant sell-off they experienced last year. Lee suggests that investors may have been wrong about an impending recession, and the worst of the economic and earnings difficulties may already be behind us.

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