The economy is in shambles but FAANG stocks are on fire and nearing record highs
“Tech companies are thriving,” said 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.”
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Yet these stocks have all bounced back because, especially during these uncertain times, investors are craving growth and strong track records.
“There is much more confidence and visibility in the tech sector. Investors are willing to pay a premium for that,” said Keith Lerner, chief market strategist at Truist/SunTrust Advisory.
Earnings estimates for the tech sector have dipped only 3% over the past month, according to Lerner. The communication services sector, home to Facebook and Alphabet, is down 14%. Both are much better than the 21% drop in earnings estimates for the S&P 500 overall.
Moreover, Big Tech has the financial flexibility to get through the crisis. Not only have many of these companies built up mountains of cash, but they can easily tap the capital markets to get plenty more, if needed.
The big five make up 21% of the S&P 500
The rapid resurgence of Big Tech has played an outsized role in the recovery of the overall stock market because of the dominant role these companies have in the S&P 500.
The five biggest stocks — Apple, Amazon, Microsoft, Alphabet and Facebook — make up 21% of the entire S&P 500’s market value, according to Goldman Sachs, which said this is the highest market concentration in recent memory.
That means those five companies’ sector weighting is roughly equal to the combination of three of the stock market’s weakest sectors: financials (10%), industrials (8%) and energy (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,” said Principal’s Shah. “The truth is, there are major economic risks underlying this.”
This phenomenon is working in Wall Street’s favor by helping to carry the broad market indexes sharply higher, even if some of the underlying pieces remain weak.
And the rising stock market could even help the real economy if it translates to stronger consumer and business confidence that leads to a rebound in spending.
But there are limits to how long Big Tech can carry the rest of the market on its shoulders.
“The divergence between winners and losers is extreme. At some point, that rubber band will stretch too much,” said SunTrust’s Lerner.
Wall Street’s reliance on Big Tech could backfire if the industry suddenly falls out of favor in the event of poor earnings or an antitrust crackdown by Washington, for example.
“We almost need every single large tech company to continue t
o do well,” said Shah. “That is a huge vulnerability for the market.”