Five companies — Apple, Alphabet, Microsoft, Amazon and Facebook — account for nearly $3 trillion of the S&P 500’s roughly $22 trillion market capitalization. Now the most highly valued companies in the world, their stratospheric rise and heavy weighting in the S&P have investors and market commentators asking a lot of questions.
It may seem like U.S. equities recovered from the financial crisis years ago, but the market as a whole has not. The global financial crisis naturally hit financial stocks the hardest, and the sector declined nearly 80% following its peak in May 2007. And while the S&P 500 Index reached new highs way back in 2012, financials have lagged.
Technology stocks have long been thought of as high beta, or more prone to sharp price swings than, say, a consumer staples or utilities company. Not so much anymore: Technology stocks are currently among the least volatile in the S&P 500 and are experiencing an influx of broad-based buying by a cross-section of investors. Growth funds, hedge funds, momentum strategies and multi-asset strategies have been drawn to technology stocks for their higher growth rates, visibility of earnings, strong balance sheets and dominance in their industries.
The U.S. equity bull market is in its eighth year, but returns can’t go up forever. With volatility near historic lows and the last market pullback a distant memory, investors may not be prepared for a downturn. But declines are a normal part of markets, and investors who stay the course over the long run have typically been rewarded.
High-flying tech companies have gained attention for their robust returns in recent years, but those strong gains have also pushed market valuations higher. When excluding FANG stocks (Facebook, Amazon, Netflix, and Google parent Alphabet) plus the two largest technology companies (Apple and Microsoft), the U.S. does not look as overvalued as it may first appear.
Shares of many technology giants are at record highs, rekindling comparisons to the dot-com bubble. But this boom is different. The dominant companies have solid profits, enormous cash flows, large market share and high barriers to entry. At current price levels, there is no denying that the valuations are high, but nowhere near the unsustainable levels of the dot-com period.