Outsized returns delivered by Amazon.com, Netflix and other heavyweight technology stocks have made them heroes on Wall Street, but some strategists warn that investors’ reliance on them exacerbates the risk of a steep downturn.
Amazon’s 35% surge in 2018 has pushed its market capitalisation up to $770 billion, equivalent to 3% of the S&P 500 and close behind Apple’s nearly 4% share of the index.
Apple, Facebook, Amazon, Netflix and Google-parent Alphabet have grown their collective market value by more than 40% in the past year to $3 trillion, and they now account for a quarter of the Nasdaq Composite Index.
‘Crowded trade’
Technology stocks have been widely viewed in recent months as a “crowded trade,” a situation where most investors have the same opinion, increasing the potential for a volatile sell-off if sentiment changes.
“It’s a big momentum trade, investors don’t care if they’re paying 15 or 20 or even 50 times earnings,” said Mike O’Rourke, Chief Market Strategist at JonesTrading. “The problem is, once those names start giving up those gains, then the market starts to have problems.”
Investors have been attracted to those stocks for good reason: Amazon’s revenue ballooned 31% to $178 billion last year, while Netflix is expected by analysts on average to more than double its net income to $1.2 billion in 2018. Investors nervous about how much longer a nine-year bull market can last have favoured big tech names as among the most reliable on the stock market because their business models are often viewed as disruptive and less susceptible to economic downturns, at least over the long run.
The popularity of Amazon, which is pushing beyond online retail and cloud computing into supermarkets and even healthcare, has left it trading at 167 times expected earnings, up from around 100 a year ago, according to Thomson Reuters Datastream. By comparison, the S&P 500 is trading at about 17 times expected earnings.
“If you ask anyone right now, if it’s a business owner they’ll say they’re afraid of Amazon. If they’re an investor, they’ll tell you Amazon is going up forever,” said Andrew Bodner, president of Double Diamond Investment Group. “Overall, it creates more volatility for the market because everyone owns Amazon, and if Amazon goes down you’ll see that reflected,” Mr. Bodner said.
Investors’ increased reliance on passively managed index funds has also contributed to the rally in technology shares because the companies’ inclusion in the S&P 500 and other indexes means money will be poured into them even if they have expensive earnings multiples, Mr. O’Rourke said.
Momentum for some major tech stocks is already showing signs of moderation. Facebook has fallen 5% after hitting a record high in early February, with some investors worried that people are spending less time on the social media platform. Posing a potential threat to the rally, the S&P 500 technology index is trading at 18.8 times expected earnings, 12% above its 15-year average, according to Thomson Reuters Datastream.
