One of the factors that helped fuel the unprecedented rise of the S&P 500 over the past decade was the astronomical growth of companies in the tech sector, most notably Facebook (FB, Financial), Apple (AAPL, Financial), Amazon (AMZN, Financial), Netflix (NFLX, Financial) and Alphabet's Google (GOOGL, Financial), commonly known as FANG stocks. In terms of gaining an overall perspective of the current investment climate, many investors are blissfully unaware of the disproportionate sway these stocks hold over the wider market. Some perspective is warranted.
Recently, the tech-heavy Nasdaq composite hit a record high for the first time in three months. Meanwhile, the broader stock market seemed anemic by comparison. The S&P 500 and the Dow Jones Industrial Average indexes have gained only 2% and 4% respectively.
The forever-surging market capitalizations of the tech behemoths constitute an increasing share of the S&P 500. Facebook, Microsoft (MSFT, Financial), Amazon, Apple and Alphabet accounted for more than one-third of the $2.7 trillion increase in value of the S&P 500 over the past 12 months. Some warn it may be foreboding that a small group of high-market capitalized companies are substantially outperforming most other stocks in the indexes.
The five biggest companies by market capitalization are tech stocks; the $1 trillion mark, now well within Apple’s reach. These five stocks now make up more than 15% of the S&P 500 — the most for any top five companies since early 2000.
Even though tech stocks have seen renewed favor from investors, the sector continues to grow apart from the rest of the index. Some investors in the midst of their euphoria may not have been aware of the fact that as of June 8, according to Bank of America Merrill Lynch, tech stocks contributed 75% of the S&P 500’s return in May, and currently represent 26% of the index.
Despite the selloff in March, prompted by Facebook’s privacy abuse scandal, investors have recently poured $2.3 billion into tech sector funds in the week of June 8, the second-largest weekly addition on record, according to EPFR Global. The new movement of funds far exceeds any outflows that occurred in February, March or April combined. Given the surge in inflows, one might think that data harvesting concerns and public outrage over privacy abuses in the tech sector were simply an evanescent moment of no consequence, never to return.
Tech stock investors should take note that, by comparison, none of the corporations in other sectors have had the luxury of operating with impunity in terms of the costs and burdens regulatory oversight imposes on most other companies, not in the social media/tech sector. The government’s attitude toward the FANG group has been one of total laissez-faire. That regulatory-free business environment is coming to an abrupt end.
A compelling case can be made that investors are downplaying the risk to some companies’ essential business models that imminent regulations are sure to affect. After Facebook CEO Mark Zuckerberg’s testimony to Congress, it was discovered the company had sold customer information to a select group of companies after the time when they had indicated the practice had stopped in 2015. This has raised the ire of some regulators and legislators.
Another reason that should give exuberant tech stock investors pause is that in the 21st century internet economy, today’s tech superstar could be tomorrow’s has-been. The pace of change in the tech industry compared to that in the large industrial sector of yesteryear is far more rapid and, in some instances, unforgiving. Although the fortunes of some companies in the Dow Jones Industrial Average of the mid-20th century may have dwindled, their decline was not precipitous, but gradual. Changes in industry sectors as well were more measured. The common element in both eras is that many investors failed to anticipate the coming changes.
Disclosure: I have no positions in any of the securities referenced in this article.
