Tech Stocks Are Soaring By $600 Billion, But It's Not Without Risks

A $634 billion gain in the Nasdaq 100's top three mega-cap firms this month has almost propelled the tech-heavy index into a new bull market. But, the form of the comeback may indicate that it may not have much further to run.

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The advances in Apple Inc., Google Inc., and Microsoft Corp. have been spurred by their so-called haven status, as worries of contagion in the banking industry pushed investors into megacaps' cash-rich balance sheets and long-term income streams. Nvidia Corp., Meta Platforms Inc., and Tesla Inc. are the index's top gainers in March.

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Microsoft and Alphabet have had their best week in years, despite bank turmoil.

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But, while big tech may provide some security in volatile times, it is not without hazards. Valuations are high, the earnings outlook is bleak, and a crucial driver of the rally – dropping bond rates — may be fleeting.

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"Right now, you're paying a significant premium to be in the industry at a period of above-average risk," said Keith Lerner, co-chief investment officer at Truist Advisory Services. "We don't love tech, but although alternative solutions don't look fantastic too, tech has grown so crowded that if sentiments change, we may see a true turnaround."

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The Nasdaq 100 is currently up 19.7% from its closing low in December thanks to this month's 6.2% surge, which puts it close to the 20% milestone that denotes the start of a new bull market. A 17% year-to-date gain contrasts with the S&P 500's 3.4% total gain.

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On Monday, the Nasdaq 100 increased 0.1%.

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The shift back toward large tech gained momentum after the failure of Silicon Valley Bank sparked concerns about a contagion effect, which was a partial reversal of the general weakening during 2022. The yield on the US 10-year Treasury fell from a peak of over 4% earlier this month to approximately 3.5% as a result of worries about the crisis' effects on the economy.

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Lower yields are good for tech values because they increase the current value of future earnings, but the decline may not last, especially if it appears like banks' worst days are behind them and the Federal Reserve anticipates continuing to raise rates to combat inflation.

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The shift back toward large tech gained momentum after the collapse of Silicon Valley Bank sparked concerns about a contagion effect, which was a partial reversal of the general weakening during 2022. The yield on the US 10-year Treasury fell from a peak of over 4% earlier this month to approximately 3.5% as a result of worries about the crisis' effects on the economy.

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Lower yields are great for tech values because they increase the current value of future earnings, but the decline may not last, especially if it appears like banks' worst days are behind them and the Federal Reserve anticipates continuing to raise rates to combat inflation.

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Michael Nell, a senior investment analyst, and portfolio manager at UBS Asset Management, believes that technology will continue to grow in the long run, but that pace may slow in the near term.

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"There's been a steady series of terrible events that have people fleeing to big tech for protection, but valuations are usually stretched today, and if investors warm to the concept that the world isn't ending, they may believe this trend is over."

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Alphabet shares are on course for their greatest monthly rise in many years, as the parent company of Google leads the rally in mega-cap tech firms. Recent gains have also been fueled by the company's release of the Bard chatbot, a conversational artificial intelligence service that Bank of America Corp. analysts said could help alleviate concerns about competition from Microsoft's AI-powered Bing.

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