In just over a decade, the U.S. tech industry has gone from being four times smaller than the entire European stock market to overtaking it completely at a whopping $9.1 trillion.
A new research report by Bank of America shows a lot of what we already know: That the US tech sector is driving the S&P 500 rally of 55% since the March pandemic lows. But Bank of America puts some tantalizing numbers out there.
While the U.S. tech industry is now worth $9.1 trillion, the entire European stock market is worth $8.9 trillion. Perhaps it’s not a huge difference, unless you consider that it is a single U.S. industry compared with the entire European market. And unless you consider that in 2007, the U.S. tech industry was significantly smaller than the European market. They’re also bigger than the Japanese equities market (around $5.7 trillion) and the Hong Kong/China market (around $4.4 trillion).
According to BofA, in January this year, the five biggest of the big--Apple, Amazon, Microsoft, Alphabet (the parent company of Google) and Facebook accounted for 17.5% of the S&P 500 index. Fast forward August and these companies account for more than 20%. That’s the COVID-19 pandemic boost.
From yet another perspective, Berenberg senior strategist Jonathan Stubbs tells Barron’s that four of these “tera-caps” (stocks worth more than $1T, including Alphabet, Apple, Amazon and Microsoft) are even bigger than the entire U.S. bank and energy sectors combined. bined.
And these stocks are still bulldozing the way upwards as we speak.
Apple shares have rallied another 30% since July 30, when it announced its 4:1 stock split. Today, they were rallying another ~5% as the split took effect.
And now everyone’s wondering who will be the next to split? Amazon or Alphabet?
And the wider sentiment still seems to be that Apple hasn’t even seen its best days yet.
Microsoft has also been on a tear, some of which is tied to the potential for it (along with Walmart) to buy out TikTok, which in turn is under threat of a Trump ban if it doesn’t sell out to an American company. It’s the only one of the giant 5 that was trading lower Monday because of complications related to this deal.
So, it all sounds great for tech and anyone who’s been riding the tailwinds of these stocks. But the reality is that it creates a very lopsided market that is heavily dominated by a small number of huge stocks. What could go wrong? Quite a lot, actually, but not for a while because the Fed is backing the stock market rally for all intents and purposes.
For starters, the stock market rebound we’ve seen since March is fundamentally on shaky ground. The “recovery” has almost singularly been about piling into these mega cap tech stocks, so the reality of recovery is somewhat skewed. The rally has been led entirely by the tech-heavy Nasdaq.
But right now, as noted by Forbes, we are in a “Goldilocks” scenario. That means that if economic data comes out weaker than expected, traders will just bank on continued Fed support of the rally with a dovish policy stance.
So, this tech-heavy rally can be sustained--until it can’t. But we won’t find out until dust really settles on the pandemic.
If bond yields start to rise, then it could be game over.
These stocks have done so much rallying because of the pandemic because “so much of their lifetime profits lie far in the future, meaning their valuations benefit from low rates while short-term pandemic-related hits matter less,” notes the WSJ. And more than anything, these stocks will be vulnerable to rising yields. And if they go down, because the market is so mega cap heavy, they’ll take the broader market down with them.
By Michael Kern for Safehaven.com
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