Big tech poses a problem for investors as well as Congress

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A good year for the five biggest US stocks despite the worst recession the country has faced in decades has further increased their influence on the stock markets.

Apple, Microsoft, Amazon, Alphabet and Facebook now represent more than a fifth of the S&P 500. The five largest companies haven’t held such a large share of the index since the 1980s, according to the S&P indices. Dow Jones.

This concentration was further strengthened on Friday when Apple, Amazon and Alphabet, Google’s parent company, continued their steady march towards recent stock market highs, after exceptional results on Thursday.

The strong stock price performance came the same week that senior executives from these and other tech giants were pressured by U.S. lawmakers over the darker practices that have helped them dominate their industries. One of those criticisms has been their aggressive acquisition strategy of buying smaller competitors. In a 2012 email, Facebook CEO Mark Zuckerberg admitted he was planning to acquire the Instagram photo app in order to “neutralize” it.

Elizabeth Warren, U.S. Senator from Massachusetts and former Democratic presidential candidate, said: “Big Tech thinks they’re too big to be held accountable – and with unscrupulous antitrust enforcement, they are,” in a Twitter message.

Yet the criticism did little harm. The strong performance of the stock market this year has recast tech giants as defensive corners of stocks during the global pandemic, helping the S&P 500 to erase its losses for 2020 so far. The S&P 500 would be down 5% if it did not include these stocks.

The greatest influence in the market comes with risk. When the shares of these top five companies fall, it can crush the gains of an otherwise robust larger market. On a trading day last month, nearly three-quarters of S&P 500 companies posted a gain, but the index rose only 0.2%, weighed down by the top five stocks that lost. the value on the day.

The S&P 500 is one of the most highly referenced indices on the US stock market and serves as the benchmark for more than $ 11 billion in assets, according to S&P estimates. This amount has increased over the past decade as passive investing has prompted more investors to buy funds that track popular indices.

“There is a concentration risk for investors who have held an index fund for a long time as they are overweighted in these stocks and in particular in technology stocks,” said Liz Young, director of market strategy for BNY Mellon Investment Management.

Soaring stock prices for the top five groups helped push the S&P 500’s 12-month price-to-earnings ratio above 25 for the first time since September 2000, during the dotcom boom.

Jonathan Golub, chief U.S. equities strategist for Credit Suisse, said the big tech groups were on track to make up to 90% of the profits they made in 2019 – a sign of resilience as profits to through the market crater. “While we wouldn’t expect them to be the same as last year, these incomes are still pretty good,” he said.

Circle timeline showing the big five tech companies buying the competition before it becomes a threat. Major technology acquisitions, transaction value (in billions of dollars)

Profits of S&P 500 companies fell by a third in the second quarter, according to Refinitiv estimates based on the results of about half of the index that were released for the period.

Apple, Microsoft and Amazon are also some of the most popular stocks held by users of Robinhood, one of the retail platforms that has seen a surge in activity this year, attracting new investors every day. to participate in the stock market rally that started in March.

“It is clear that some of these valuations for growth stocks have reached very high levels,” said Andrew Slimmon, senior portfolio manager of Morgan Stanley Investment Management. “The gap between value stocks and growth stocks is so extreme – you have to wonder if they are being driven by speculation.

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