“Tech companies are thriving,” mentioned Seema Shah, chief strategist at Principal Global Investors. “No physical contact and lockdowns mean that this is a crisis that almost works in technology’s favor.”
No money crunch right here
Yet these stocks have all bounced again as a result of, particularly throughout these unsure instances, buyers are craving development and sturdy observe data.
“There is much more confidence and visibility in the tech sector. Investors are willing to pay a premium for that,” mentioned Keith Lerner, chief market strategist at Truist/SunTrust Advisory.
Earnings estimates for the tech sector have dipped solely 3% over the previous month, in response to Lerner. The communication companies sector, dwelling to Facebook and Alphabet, is down 14%. Both are a lot better than the 21% drop in earnings estimates for the S&P 500 total.
Moreover, Big Tech has the monetary flexibility to get by the disaster. Not solely have many of those corporations constructed up mountains of money, but they’ll simply faucet the capital markets to get loads extra, if wanted.
The huge 5 make up 21% of the S&P 500
The fast resurgence of Big Tech has performed an outsized function in the restoration of the general inventory market due to the dominant function these corporations have in the S&P 500.
The 5 greatest stocks — Apple, Amazon, Microsoft, Alphabet and Facebook — make up 21% of all the S&P 500’s market worth, in response to Goldman Sachs, which mentioned this is the best market focus in latest reminiscence.
That means these 5 corporations’ sector weighting is roughly equal to the mixture of three of the inventory market’s weakest sectors: financials (10%), industrials (8%) and power (3%).
“When you look under the surface, the market is not as strong as the headlines suggest. That’s because of the strength of tech,” mentioned Principal’s Shah. “The truth is, there are major economic risks underlying this.”
This phenomenon is working in Wall Street’s favor by serving to to hold the broad market indexes sharply larger, even when a few of the underlying items stay weak.
And the rising inventory market may even assist the actual economy if it interprets to stronger client and enterprise confidence that results in a rebound in spending.
But there are limits to how lengthy Big Tech can carry the remainder of the market on its shoulders.
“The divergence between winners and losers is extreme. At some point, that rubber band will stretch too much,” mentioned SunTrust’s Lerner.
Wall Street’s reliance on Big Tech may backfire if the business all of the sudden falls out of favor in the occasion of poor earnings or an antitrust crackdown by Washington, for instance.
“We almost need every single large tech company to continue to do well,” mentioned Shah. “That is a huge vulnerability for the market.”