Big Tech Stocks Keep Rallying Among Danger Signs

The negatives for big tech stocks are growing, including trade wars, privacy breaches, threats of regulatory action in areas such as antitrust, and a slowing economy, yet these stocks continue to be market leaders, partly because large investors continue to be heavy buyers. Microsoft Corp. (MSFT), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), and Facebook Inc. (FB) combined to deliver 19% of the total return for the S&P 500 Index (SPX) for the year-to-date through July 18, 2019, according to calculations by S&P Dow Jones reported in The Wall Street Journal.

“Many people just want them whether interest rates are rising, declining or staying where they are,” as Jamie Cox, managing partner at Virginia-based wealth management firm Harris Financial Group, told the Journal. His firm owns shares of Microsoft and Amazon and has been adding to its position in Microsoft. Mona Mahajan, U.S. investment strategist at Allianz Global Investors, said: “If you don’t own a core holding in some of the leaders, you might be missing out. Those few names are probably benefiting disproportionately because they have real growth stories behind them.” 

As a percentage of the total return for the S&P 500, the proportion delivered by these four stocks so far in 2019 is roughly equal to their contribution in 2017 and through the first three quarters of 2018, S&P Dow Jones Indices adds. Meanwhile, leading asset managers, including Vanguard Group, State Street Corp., and T. Rowe Price, generally have increased their holdings of these stocks, as well as of Google parent Alphabet Inc. (GOOGL) and Netflix Inc. (NFLX), during the first quarter of 2019, per data from FactSet Research Systems cited by the Journal.

Many investors believe that these stocks are poised to deliver high rates of growth no matter where the general economy goes. This sentiment is based on their association with hot trends such as cloud computing and artificial intelligence (AI).

Among the risks with the FAANG and FAAMG stocks is that they are in the top 10% of the most crowded S&P 500 stocks, per Ann Larson, managing director of global quantitative research at AllianceBernstein, as reported by the Journal. Her team looked at a variety of measures to make this assessment, such as the biggest holdings by active investment managers and how rapidly they were adding to these positions in recent quarters. Among market sectors, technology was the most crowded per their analysis.

Additionally, tech stocks in general, and these stocks in particular, have high valuations compared to the S&P 500 as a whole. Those valuations are partly driven by expectations of interest rate cuts ahead by the Federal Reserve, which redueces the discount rate applied to anticipate future earnings.

Shares of Alphabet and Facebook took hits in June when reports emerged that they were the subject of antitrust investigations by the U.S. federal government. The Federal Trade Commission (FTC) is conducting probes into Amazon.com and Facebook, while the Department of Justice (DOJ) is investigating Apple and Alphabet, Barron’s reports.

The specter of regulatory actions that would constrain these tech giants, perhaps forcing them to exit certain markets or to divest certain business units, is apt to be a more pressing concern for investors over time. Indeed, the Google division of Alphabet already has been hit with three big fines from European regulators for anticompetitive or deceptive practices since 2017, with a total value of $9 billion so far.