By Akane Otani 

Three technology titans have powered nearly half of the S&P 500's advance this year, a worrying sign for investors expecting a strengthening economy to lift shares of manufacturers, oil companies and other firms whose fortunes typically improve with growth.

Amazon.com Inc. has accounted for 27% of the broader index's 1.6% gain through Tuesday, according to S&P Dow Jones Indices' data. That is followed by Microsoft Corp., which has contributed 13%, and Netflix Inc. at 8.3%. U.S. stocks fell Wednesday, but Amazon and Netflix extended their 2018 gains, adding to their dominance over the S&P 500.

"When you see a Netflix or Amazon leading, it's not necessarily a great sign of investor confidence, since you know those names can always deliver growth no matter what's going on," said Jack Ablin, founding partner and chief investment officer at Cresset Wealth Advisors.

Investors have fretted in recent years about the dominance of a single sector or stock in the market, but those fears have generally proved unfounded. Markets continued marching higher even after shares of Apple Inc., which was a driver of the rally, stalled for part of 2016.

The S&P 500 technology sector has driven more than three quarters of the index's gains, according to S&P Dow Jones Indices. The next biggest contributor is the consumer-discretionary sector -- which includes tech-focused Amazon and Netflix -- with more than a third of the advance.

To some investors, the continued outperformance of technology-oriented companies is surprising. After the tech sector jumped 37% in 2017, nearly doubling the broader S&P 500's advance, many investors expected the rally to stall or be overtaken by other sectors.

Among those expected to gain were cyclical stocks like commodity producers, manufacturers and banks whose businesses tend to improve as the economy strengthens and prices rise.

Instead, energy shares have extended their rout, even as U.S. crude prices have bounced off their 2014 lows. Exxon Mobil Corp. and Chevron Corp. have together chipped away about 12% from the S&P 500's year-to-date advance. And industrial firms, which soared after the 2016 presidential election on bets that the Trump administration would pump up infrastructure spending, have lagged behind the S&P 500, as some investors have questioned how the administration will secure funding for its plan.

Other investors predicted bank shares would begin outperforming the broader market again after the passage of the Republican tax overhaul. And those companies have seen a boost: JPMorgan Chase & Co. and Bank of America Corp. together have made up 12% of the S&P 500's 2018 gains, according to S&P Dow Jones Indices.

Yet enthusiasm for technology stocks hasn't tapered off. Roughly a third of global fund managers say they are overweight technology stocks in their portfolios, according to a Bank of America Merrill Lynch survey conducted at the start of the month. That was the highest share of overweights of all 11 S&P 500 sectors.

Tech's dominance has helped the Nasdaq Composite, which heavily weights shares of technology companies, outperform other indexes so far this year.

Mutual funds and exchange-traded funds tracking technology stocks also attracted among the biggest investor inflows of all sectors for the week through Feb. 14, according to data from fund-tracker EPFR Global. That is even as data suggests technology stocks, which trade at a higher price-to-earnings ratio than the broader S&P 500, are relatively expensive.

The three stocks leading this year's advance -- Amazon, Microsoft and Netflix -- have benefited from strong earnings showing their businesses are continuing to grow at a rapid clip.

Amazon, whose shares are up 27% this year, got a boost after the firm said it was teaming up with Berkshire Hathaway Inc. and JPMorgan Chase to try to reduce health-care costs for their workers. And they took another leg higher after the company said in February that its quarterly profit topped $1 billion for the first time, thanks to record holiday sales.

Shares of Microsoft -- whose booming cloud business has helped it reclaim dominance in the tech industry even as sales of personal computers around the world have slowed -- are up 7% in 2018. Streaming giant Netflix, whose investments in original shows helped it claim new subscribers at a record rate in the fourth quarter, is up 46% this year. The S&P 500 is weighted by market capitalization, meaning companies with the largest market values exert the most influence on the overall index's movements.

"When you have something that can really grow and innovate, there's really no limit to the upside," said Thomas Plumb, president of Wisconsin Capital Management, whose Plumb Equity Fund includes holdings in S&P 500 technology sector names like Visa Inc. and Alphabet Inc., as well as Ansys Inc., a developer of engineering simulation software.

Last year's rally was largely driven by five companies known as the FAANG stocks, which include Amazon and Netflix, along with Facebook Inc., Apple and Google parent Alphabet. But the latter three companies haven't kept pace in 2018, following a batch of mixed earnings reports and increased pressure from regulators.

Facebook is facing scrutiny prompted by a U.S. indictment alleging that Russia manipulated social-media platforms. Apple has come under pressure amid falling iPhone sales, as well as blowback over its decision to slow performance on older iPhones. And Alphabet stumbled after reporting higher quarterly expenses tied to traffic-acquisition costs and amid growing criticism over how the company monitors its clout and content.

Their shares have lagged behind Amazon, Microsoft and Netflix this year after all six notched double-digit percentage gains in 2017: Facebook is up 0.8% so far in 2018, while Apple is up 1.1% and Alphabet has risen 5.7%.

Write to Akane Otani at akane.otani@wsj.com

 

(END) Dow Jones Newswires

February 21, 2018 18:59 ET (23:59 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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