By Akane Otani
Three technology titans have powered nearly half of the S&P
500's advance this year, a worrying sign for investors who expected
tech's dominance to give way to cyclical sectors, like materials or
industrials, as the economy improved.
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%.
"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 the past 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. Banks have also been a big driver of the Dow Jones
Industrial Average's 1% gain this year, with Goldman Sachs Group
Inc. and JPMorgan lagging only behind Boeing Co.'s
contribution.
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 with a 4.8% increase.
Mutual funds and exchange-traded funds tracking technology
stocks also attracted among the biggest 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 corporate
earnings results 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 17:04 ET (22:04 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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