By Akane Otani and Michael Wursthorn
The Nasdaq Composite Index overcame an early slump in the second
quarter and is on course to book its eighth straight quarter of
gains, as fears of a trade war stifling global growth pushed
investors to dump industrial stalwarts and increase their bets on
shares of large technology companies.
The tech-heavy index thrived in a tumultuous three months for
U.S. stocks, which struggled to gain ground as investors were
buffeted by worries about trade tensions, political uncertainty in
the eurozone and signs of slowing momentum in the global
economy.
The S&P 500 and the Dow Jones Industrial Average rose 2.9%
and 0.5%, respectively, for the quarter through Thursday, trailing
the Nasdaq's 6.2% advance. The first two indexes remain well below
their January records, while the Nasdaq notched a series of
all-time highs in June.
The one-directional nature of the stock rally has left investors
increasingly worried that a market whose gains have been heavily
dependent on technology stocks could reverse sharply in the second
half of the year.
"A lot of the investing public is piling into the same things,"
said Jim Paulsen, chief market strategist at Leuthold Group, who
added that the S&P 500 would be mostly flat this year without
technology companies. "There's a lot of sheep following one
another."
Technology had mostly avoided the tariff turmoil for much of the
quarter, including when President Donald Trump imposed steel and
aluminum tariffs on the European Union, Mexico and Canada on May
31. Industrial stocks in the S&P 500 fell 1.5% that day, as
shares of Boeing Co. and other multinational manufacturers posted
losses, while the Nasdaq Composite suffered a modest 0.3%
decline.
Trade actions have had a muted impact on tech stocks going back
to 1995, according to Bank of America Merrill Lynch data that
showed the sector tends to be among the best-performers in the 30
days following the announcement, implementation or the end of such
a policy. But some analysts warn that the latest trade battle could
play out differently considering the Trump administration's focus
on protecting U.S. intellectual property and tech's growing
prominence in the global economy.
The Nasdaq on Monday posted its biggest one-day decline since
April after reports suggested the Trump administration was planning
to curb foreign investment in U.S. technology firms. The tech
sector's high exposure to foreign revenue also exposes it to swings
in the foreign-exchange market: Should the recent rebound in the
U.S. dollar continue, that could hurt multinational companies whose
goods will become more expensive to foreign buyers, and overseas
revenue will be worth less when converted back into dollars.
"A lot of technologies are borderless," said Tony Kim, portfolio
manager of the BlackRock Technology Opportunities Fund, who said
the threat of protectionist policies against China is one of the
bigger perceived risks for investors right now. "Tech needs to be
in a stable environment, and this would inject a sense of
instability."
Any stumbles in tech-stock prices could raise the risk of market
contagion and wreak havoc on portfolios.
Tech's growing dominance has skewed the broader S&P 500 away
from so-called defensive stocks -- sectors such as utilities,
consumer staples and health care -- that investors have
traditionally gravitated toward during bouts of market volatility.
That has left some analysts concerned that investors in
index-tracking funds could be dangerously exposed to a
pullback.
The degree of defensiveness within the S&P 500, which
Leuthold Group calculated by using the percentage of the index's
market capitalization comprised of defensive sectors, has fallen
nearly 60% from 1991 through early June, according to the group's
data. That has increased the weighting of highflying growth stocks
within the S&P 500, reducing its overall effectiveness as a
diversified portfolio for investors who opt to passively track the
broad index, Mr. Paulsen said.
The S&P 500 is "not the same index it was when your father
bought it," he added.
Yet some analysts worry that, with uncertainty swirling over
whether the U.S. will ratchet up trade tensions with China, the
European Union and others, investors have mispriced the risk that
the tech sector faces.
Technology companies in the S&P 500 have the highest share
of overseas revenue of the broad index's 11 sectors, with a
foreign-exposure level of about 59%, according to FactSet and BofA
Merrill Lynch data. That is greater than the broader S&P 500,
which gets about one-third of its revenue from overseas and
indirect exposure via commodities, the bank added.
Still, some investors have been viewing tech stocks as a safety
play, betting that companies that have produced double-digit
percentage gains this year will be able to continue growing
earnings even under more restrictive global trade conditions.
Amazon.com Inc.'s quarterly profit topped $1 billion for the first
time in the most recent quarter, while Facebook Inc.'s earnings
soared even after its user-data crisis and Microsoft Corp. posted
double-digit growth in profit and revenue.
"Long term, it looks like a legit growth story," said Paul
Christopher, head of global market strategy for Wells Fargo
Investment Institute.
Even as investors say technology firms as a whole appear to be
on more stable footing than they were at the height of the dot-com
era in 2000, many remain cautious, citing the tendency for the
stock market to contract when it is led by just a handful of
outperformers.
"Whenever the market narrows like this and everyone wants to own
the same stocks like the [FAANG -- Facebook, Amazon, Apple Inc.,
Netflix Inc. and Alphabet Inc.] stocks, there is a feeding frenzy
that can go on for a while," said Mike Balkin, a portfolio manager
at William Blair. "When it ends, it usually doesn't end well."
Write to Akane Otani at akane.otani@wsj.com and Michael
Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
June 29, 2018 15:22 ET (19:22 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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