The S&P 500’s five biggest companies, Apple, Microsoft, Amazon, Alphabet and Facebook are expected to report strong third-quarter earnings in coming weeks, according to a Reuters’ report.
The companies now account for 28 per cent of the index’s weighting and have been responsible for 25 per cent of its earnings, Goldman Sachs said earlier this month.
On average, the tech and internet-driven stocks have gained 49.23 per cent in 2020, compared to a seven per cent gain for the S&P 500 – and are up 9.6 per cent on average since September 21, versus 6.6 per cent for the S&P 500.
There are worries that mega-cap tech companies are exposed to factors that may cut their allure in the months ahead. .
“It’s all about trying not to have all your eggs in one basket,” Laura Kane, head of Americas thematic investing at UBS Global Wealth Management was quoted to have said. “It’s about trimming certain exposures and rotating into something else.”
UBS analysts have recommended diversifying out of mega-cap tech stocks on signs of an economic recovery and climbing valuations, urging rebalancing into the United States’ semiconductors, which are more sensitive to economic recovery as well as emerging market value stocks and the United Kingdom-based equities.
Regulatory concerns have heightened following a scathing report by Reuters detailing market power abuses by Google, Apple, Amazon and Facebook issued earlier this month by the US House Judiciary Committee’s anti-trust panel.
The report raised concerns that tough new rules and stricter enforcement for big tech companies would follow should Democratic presidential candidate, Joe Biden, win the White House.
The median 12-month forward price-to-earnings ratio for the tech stocks is 31, while the S&P 500 trades at a 12-month forward PE ratio of 22, according to Refinitiv.
Still, they are not as extended as in the dotcom period, with overall profitability, dividends and balance sheet strength in much better shape than 20 years ago.
Companies’ investors will be watching next week as the big tech names report third-quarter results including Netflix on Tuesday, Tesla and Verizon Communication on Wednesday, and Intel on Thursday.
Many investors still see the big tech names, with their strong balance sheets and financial results, as havens as coronavirus cases continue to climb and the economy struggles with a lack of new fiscal stimulus.
“These companies deliver powerful profits,” Jack Ablin, chief investment officer at Cresset Wealth Advisors was quoted. “People have to keep in mind that the five largest tech companies make more in earnings than the entire Russell 2000 combined, so this isn’t the Internet bubble.”
