By Mike Dolan
LONDON (Reuters) – After a torrid 2022 for its stock prices, it seems Big Tech can do no wrong again this year.
The eye-popping outperformance of the U.S. digital and technology giants this year helps explain the slightly puzzling levity of stock markets amid all the recession handwringing – not least because these mega caps dominate the major indexes and pop up in almost every investment bucket.
Worried about an economic downturn? Rotate to mega caps from the small firms at the coalface. Betting on lower interest rates? Scramble for ‘long-duration’ tech firms with rate-sensitive valuation. Excited by a revolution in artificial intelligence? Look for digital giants in an AI arms race.
And even if you want to save the planet, stock indices screened for environmental, social and governance scores or low carbon usage tend to be loaded with Big Tech too.
In many ways, these stocks are now widely seen as both the sustainable bedrock of the modern economy as well as the high-octane vehicles best placed to ride any new quantum leap in the digital world – even if expensively priced to reflect that.
They are clearly not just tech firms anymore – covering everything from retail and groceries to microchips and autos, entertainment and advertising and even banking, if Apple’s latest foray into savings accounts is anything to go by.
The ‘Big Tech’ pie is sliced and diced in many ways, but one of the most cited indexes is New York’s FANG+TM grouping – currently comprising Facebook-parent Meta, Apple, Amazon, AMD, Netflix, NVIDIA, Google-parent Alphabet, Microsoft, Tesla and cloud-computing firm Snowflake.
Although a collective market value of $9.25 trillion is still some 25% below its late 2021 peak, these 10 stocks are still worth more than 26% of the entire S&P 500.
And their resurgent outperformance is striking.
So far in 2023, this index of what are the leading lights of the U.S. economy is up 36% – six times the year-to-date gains of the S&P 500 index.
And before you say it’s just a frothy technology bounceback from the dire 2022 of spiralling interest rates, this year’s NYFANG+TM rise is almost twice that of the Nasdaq 100 index.
Clawback has something to do with it. Last year was indeed a shocker for the group – with its 40% swoon double that of the S&P 500 as the spike higher in discount rates from the bond market zapped valuations of future cashflows.
But zoom out and the pack has still more than doubled in price since the COVID pandemic hit three years ago, far in excess of the major benchmark stock indices.
They raced higher again this week amid forecast-beating first-quarter earnings that showcased cloud-computing booms, near-giddiness about a presumed quantum leap in AI seen in products such as ChatGPT and cost-cutting via staff layoffs.
ONLY GAME IN TOWN?
Put another way, this year’s rise of these 10 mega tech stocks accounts for pretty much all of the S&P 500 gains.
If you excluded the FANG+TM stocks from the S&P 500, the rest of the 490 stocks would be marginally in the red – perhaps better reflecting wider angst around recession, the Federal Reserve’s monetary policy, the U.S. debt ceiling and geopolitics.
Emphasising how narrow the breadth of market gains has been so far this year, Morgan Stanley’s Andrew Sheets highlighted that just three of these firms – Apple, Microsoft and Meta – make up more than half the S&P 500’s rise in 2023.
“This is not an attempt to dismiss the market’s strength – these are all large companies with a large weight in the index, they matter,” he said. “But given how often the S&P 500 has been used as Exhibit A for overall ‘resilience’, it’s important to acknowledge just how idiosyncratic this macro gauge has been.”
Is it all too much, too soon this year? Are tech stocks overpriced? What happens if the presumed easing of interest rates doesn’t materialise or the AI craze turns out to be just hype or antitrust pushback from regulators goes up a gear?
A remarkable feature of the broader stock market rebound is just how unloved it is by major strategists and asset managers overwhelmingly positioned for recession in bonds and cash.
There are certainly plenty of concerns that these mega stocks may be overbought and just too expensive – even though that concern will hardly be a new worry for these stocks. JPMorgan’s team points out the top five FAANG stocks – Meta, Apple, Amazon, Netflix and Alphabet – have a price/earnings ratio one standard deviation above historical averages and this may at least hold them back.
“Tech will be trading better this year than it did last but (we) think that recent tech run is getting stretched,” they told clients.
UBS also thinks the tech-led equity rise on the back of earnings season beats may have gone too far – doubting further gains are in store and preferring bonds as the market “oscillates between the soft-landing and recession narratives.”
But love them or not, it’s increasingly hard for any investment portfolio to avoid Big Tech and its new year revival certainly mocks the consensus recession script.
The opinions expressed here are those of the author, a columnist for Reuters.
(by Mike Dolan, Twitter: @reutersMikeD.; Editing by Paul Simao)
