Tech Rally Powers Record Gains for Stocks
July 21 2019 - 5:59AM
Dow Jones News
By Amrith Ramkumar
The biggest technology companies are propelling major U.S.
indexes' record run, highlighting investor enthusiasm for the
hottest stock sector as economic growth softens.
Together, Microsoft Corp., Apple Inc., Amazon.com Inc. and
Facebook Inc. have accounted for 19% of the S&P 500's total
return this year, according to S&P Dow Jones Indices data
through Thursday. That rate is roughly in line with the
contributions made by the biggest tech stocks in 2017 and much of
last year, before a fourth-quarter reversal helped roil
markets.
Giant asset managers including Vanguard Group, State Street
Corp. and T. Rowe Price Associates Inc. generally increased their
stakes in these firms as well as Alphabet Inc. and Netflix Inc. in
the first quarter of the year, FactSet data show.
The concentrated gains contrast with much of the market. Seven
of the S&P 500's 11 sectors remain solidly below records, and
shares of small companies that stand to benefit if the Federal
Reserve cuts interest rates are well below their recent peaks.
The divergence shows investors are putting a premium on assets
that offer the prospect of significant growth, which is perceived
as scarce with falling rates and lukewarm economic data. Investors
in the coming days will weigh second-quarter results from Amazon,
Alphabet and Facebook, while Apple is set to report July 30.
"Many people just want them whether interest rates are rising,
declining or staying where they are," said Jamie Cox, managing
partner at Harris Financial Group, which owns shares of Microsoft
and Amazon and has been increasing its position in Microsoft
recently.
Fears that trade tensions will slow global growth have kept many
investors cautious, pushing them toward the FAANG stocks --
Facebook, Amazon, Apple, Netflix and Google parent Alphabet -- as
well as Microsoft. Many view these firms as less dependent on
economic activity and attractive because they tend to participate
in hot areas for investment such as cloud computing and artificial
intelligence.
"If you don't own a core holding in some of the leaders, you
might be missing out," said Mona Mahajan, U.S. investment
strategist at Allianz Global Investors. "Those few names are
probably benefiting disproportionately because they have real
growth stories behind them."
At the same time, some investors are keeping an eye on signs the
rally might be vulnerable.
Netflix, among the most popular shares in recent years, tumbled
more than 10% Thursday after subscriber data in its latest quarter
disappointed Wall Street. Fund managers surveyed by Bank of America
Merrill Lynch earlier this month ranked U.S. tech stocks the
second-most-crowded trade across markets, trailing only U.S.
Treasurys. Crowded trades are ones viewed as so likely to pay off
that bad news often results in large losses.
"The ones we tend to be a little more leery about are the ones
that are growing just because of momentum," said Omar Aguilar,
chief investment officer for equities and multiasset strategies at
Charles Schwab Investment Management.
The FAANG group and Microsoft are in the top 10% of most crowded
S&P 500 stocks, according to an analysis by Ann Larson,
managing director of global quantitative research at
AllianceBernstein.
Her firm uses a model to assess popular trades that factors in
top holdings by active managers, stakes they have been building in
the past several quarters, earnings estimates, stock performance
and bank analyst ratings. The analysis also shows that technology
is currently the most crowded sector.
The biggest tech firms aren't the only ones benefiting.
Semiconductor stocks have recovered from a dismal May and climbed
in five consecutive weeks even as companies warn that tariffs are
hurting their businesses. Shares of smaller social-media companies
are rallying in lockstep, with Twitter Inc. up 28% in 2019 and Snap
Inc., the parent company of Snapchat, more than doubling this
year.
Some of those companies are expected to record losses or slower
profit growth moving forward, but investors say their gains
illustrate a continuing search for greater returns as global bond
yields fall. Yields decline as bond prices rise and have plumbed
multiyear lows recently.
The rally is increasing attention on whether stocks are too
expensive based on common valuation metrics. The
information-technology sector now has a price/sales ratio of 4.6,
FactSet data based on revenues in the past year show, while the
broader S&P 500 has a ratio of 2.15. Facebook, Netflix and
Microsoft have much higher valuations based on sales than Amazon
and Apple.
But those concerns have prevailed for years, and some say the
time hasn't come to act on them.
"The playbook says invest in higher-quality names during times
like these, and people are following the playbook," said Brent
Schutte, chief investment strategist at Northwestern Mutual Wealth
Management.
Write to Amrith Ramkumar at amrith.ramkumar@wsj.com
(END) Dow Jones Newswires
July 21, 2019 05:44 ET (09:44 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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