Budapest Post

Cum Deo pro Patria et Libertate
Budapest, Europe and world news

How Apple and Microsoft could blow up the stock market

How Apple and Microsoft could blow up the stock market

Microsoft, Apple, Amazon, Google owner Alphabet and Facebook are the largest companies in America. These firms have a collective market value of $4.5 trillion. This means that popular passive index ETFs are heavily concentrated in just a few names.

Is there a bubble brewing in big tech stocks?

Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Google owner Alphabet (GOOGL) and Facebook (FB) are the largest companies in America, with a collective market value of $4.5 trillion.

That means that popular passive index ETFs like the SPDR S&P 500 (SPY) and Invesco QQQ Trust (QQQ), which tracks the Nasdaq-100, skew disproportionately towards the tech sector.

To put into context just how gigantic these titans of tech are, consider this: Microsoft and Apple, now worth about $2.1 trillion combined, equal nearly the entire $2.2 trillion market cap of all the companies in the Russell 2000 (RUT) small cap index, noted Chuck Royce, chairman and portfolio manager for small cap investing firm The Royce Funds, on a recent Royce Funds video.

Royce said that the biggest companies in the S&P 500 normally have a collective market value that's worth about 50% of the Russell 2000.

"The mega-caps are sort of what everyone has come to think of as the most important enterprises around the world. They are very dominant, very important. They're very disruptive. So for good reason they've achieved a global status. But I think they're in a kind of bubble as to their specific stock market performance," Royce said.

So what would happen to the broader market if investors soured on any - or all - of these tech stocks? That would be a big problem.


The bigger they are the harder they fall?

"I don't think you can ignore the fact that the market has skewed so much towards tech. Amazon and other big techs do benefit from so much money flowing to passive ETFs," said Adam Phillips, director of portfolio strategy at EP Wealth Advisors. "If there is a sudden stock sell-off, then big techs have more risk."

Mark Hackett, chief of investment research at Nationwide, agrees.

"The market today reminds me of the late 1990s," Hackett said, referring to the dot-com bubble, when even unprofitable internet companies were soaring. And stronger companies had price-to-earnings ratios that were likewise astronomical. In March 2000, Cisco (CSCO) had a P/E of 150 and Qualcomm's (QCOM) was just under 170.

That didn't end well. For those with short memories, by the end of April 2000 the Nasdaq had lost almost a trillion dollars worth of stock value when the dot.com bubble burst.

"Every time there is a crash, the sectors that flew the highest then fell the hardest," said Lindsey Bell, chief investment strategist with Ally Invest.

There's another problem today. In addition to giant tech companies dominating the big indexes, the top market performers this year are mainly tech stocks, too.

Chip equipment company Lam Research (LRCX) has nearly doubled this year, making it the top performer in the S&P 500. The second and third best S&P 500 stocks are its rival KLA (KLAC)and semiconductor maker AMD (AMD), both up more than 80%.
With so many big tech companies trading in such rarefied air, it may be tougher for them to generate strong enough earnings gains next year to keep the current rally going.

Investors are usually looking ahead - not in the rear view mirror. What a stock is worth today is largely a bet on what investors think will happen with sales and profits in the future.

Crit Thomas, global market strategist of Touchstone Investments, thinks earnings estimates for big tech and the broader market are currently too high.

"We're not really seeing analysts bringing down 2020 earnings forecasts yet," Thomas said. "We're not expecting Armageddon or for the numbers to be negative. But 10% earnings growth expectations may be too much."


Techs have soared because they deserved to do so

Still, it's hard to overlook the tech's momentum. Facebook and Apple both reported strong earnings this week. Microsoft continues to gain ground in the lucrative cloud computing business.

Even Netflix (NFLX), which has been hit by concerns about increased competition in streaming from the likes of Amazon, Apple and Disney, has enjoyed a nice pop lately after the company reported better-than-expected subscriber gains for the third quarter.

"Investors have been focused on tech for good reasons. It's very hard to dismiss a sector like tech because of what it's done for the market for the past few years," said Yousef Abbasi, director of US institutional equities and global market strategist with INTL FCStone.

If investors start to question the growth prospects of tech companies, Abbasi added, they may simply shift more money into other more traditional value-oriented sectors like energy, health care, industrials and financials.

In other words, a tech sell-off wouldn't necessarily lead to a massive market slide because other stocks would pick up the slack.
"Tech could underperform but the broader market would still hold up," Abbasi said.

AI Disclaimer: An advanced artificial intelligence (AI) system generated the content of this page on its own. This innovative technology conducts extensive research from a variety of reliable sources, performs rigorous fact-checking and verification, cleans up and balances biased or manipulated content, and presents a minimal factual summary that is just enough yet essential for you to function as an informed and educated citizen. Please keep in mind, however, that this system is an evolving technology, and as a result, the article may contain accidental inaccuracies or errors. We urge you to help us improve our site by reporting any inaccuracies you find using the "Contact Us" link at the bottom of this page. Your helpful feedback helps us improve our system and deliver more precise content. When you find an article of interest here, please look for the full and extensive coverage of this topic in traditional news sources, as they are written by professional journalists that we try to support, not replace. We appreciate your understanding and assistance.
Newsletter

Related Articles

0:00
0:00
Close
Satirical Sketch Sparks Political Spouse Feud in South Korea
Indonesia Quarry Collapse Leaves Multiple Dead and Missing
South Korean Election Video Pulled Amid Misogyny Outcry
Asian Economies Shift Away from US Dollar Amid Trade Tensions
Netflix Investigates Allegations of On-Set Mistreatment in K-Drama Production
US Defence Chief Reaffirms Strong Ties with Singapore Amid Regional Tensions
Vietnam Faces Strategic Dilemma Over China's Mekong River Projects
Malaysia's First AI Preacher Sparks Debate on Islamic Principles
Meta and Anduril Collaborate on AI-Driven Military Augmented Reality Systems
Russia's Fossil Fuel Revenues Approach €900 Billion Since Ukraine Invasion
Alcohol Industry Faces Increased Scrutiny Amid Health Concerns
U.S. Goods Imports Plunge Nearly 20% Amid Tariff Disruptions
Italy Faces Population Decline Amid Youth Emigration
Trump Accuses China of Violating Trade Agreement
OpenAI Faces Competition from Cheaper AI Rivals
Foreign Tax Provision in U.S. Budget Bill Alarms Investors
Russia Accuses Serbia of Supplying Arms to Ukraine
Gerry Adams Wins Libel Case Against BBC
EU Central Bank Pushes to Replace US Dollar with Euro as World’s Main Currency
U.S. Health Secretary Ends Select COVID-19 Vaccine Recommendations
Trump Warns Putin Is 'Playing with Fire' Amid Escalating Ukraine Conflict
India and Pakistan Engage Trump-Linked Lobbyists to Influence U.S. Policy
U.S. Halts New Student Visa Interviews Amid Enhanced Security Measures
Trump Administration Cancels $100 Million in Federal Contracts with Harvard
SpaceX Starship Test Flight Ends in Failure, Mars Mission Timeline Uncertain
King Charles Affirms Canadian Sovereignty Amid U.S. Statehood Pressure
EU Majority Demands Hungary Reverse Anti-LGBTQ+ Laws
Top Hotel Picks for 2025 Stays in Budapest Revealed
Iron Maiden Unveils 2025 Tour Setlist in Budapest
Chinese Film Week Opens in Budapest to Promote Cultural Exchange
Budapest Airport Launches Direct Flights to Shymkent
Von der Leyen Denies Urging EU Officials to Skip Budapest Pride
Alcaraz and Sinner Advance with Convincing Wins at Roland Garros
EU Ministers Lack Consensus on Sanctioning Hungary Over Rule of Law
EU Nations Urge Action Against Hungary's Pride Parade Ban
Putin's Helicopter Reportedly Targeted by Ukrainian Drones
U.S. Considers Withdrawing Troops from Europe
Russia Deploys Motorbike Squads in Ukraine Conflict
Critics Accuse European Court of Human Rights of Overreach
Spain Proposes 100% Tax on Non-EU Holiday Home Purchases
German Intelligence Labels AfD as Far-Right Extremist
Geert Wilders Threatens Dutch Coalition Over Migration Policy
Hungary Faces Multiple Challenges Amid EU Tensions and Political Shifts
Denmark Increases Retirement Age to 70, Setting a European Precedent
Any trade deal with US must be based on respect not threats', says EU commissioner
UK Leads in Remote Work Adoption, Averaging 1.8 Days a Week
Thirteen Killed in Russian Attacks Across Ukraine
High-Profile Incidents and Political Developments Dominate Global News
Netanyahu Accuses Western Leaders of 'Emboldening Hamas'
Ukraine and Russia Conduct Largest Prisoner Exchange of the War
×