Big Tech Stocks Are Soaring—Here’s Why That Could Spell Trouble For The Market

Despite growing concerns about a record number of new U.S. coronavirus cases, the stock market has largely held steady thanks to surging shares of big tech companies—though that’s resulting in a very imbalanced market, experts warn.

Even as the United States hit a record number of new coronavirus cases this week, the Nasdaq Composite index rose to several new record highs as big tech stocks continued to outperform the broader market.

“The infatuation with super-cap tech is a huge source of support” for the market right now, with these “index-dominating” stocks going “parabolic” as investors pour money into them, says Adam Crisafulli, founder of Vital Knowledge.

Shares of big tech companies such as Amazon, Microsoft, Apple, Netflix and Google-parent Alphabet have all led the market higher in recent weeks thanks to the fact they’ve been doing relatively well amid the coronavirus pandemic, with earnings holding up much better than most other industries.

Beyond sporting “ultra-solid balance sheets,” super-cap tech companies have also been able to more quickly adapt to the pandemic by instituting “virtual” models and shifting employees to remote working, Crisafulli says.

Elon Musk’s Tesla, for example, has also been instrumental in boosting the Nasdaq, with its stock skyrocketing over 250% so far this year and rising to a new record high of more than $1,500 per share.

Facebook, on the other hand, failed to end the ad boycott against its platform when it met with civil rights groups earlier this week, but investors didn’t seem to care: The stock continued to trade well as investors remain obsessed with tech stocks.

“A huge rotation is underway as investors shift into super-cap tech and shun those groups most sensitive to underlying economic fundamentals (especially the banks),” Crisafulli says.

CRUCIAL QUOTE

“Trying to argue things like ‘fundamentals’ or ‘valuation’ with the types of investors bidding up AAPL, AMZN, MSFT, etc., several percent every session is a waste – those quaint notions just aren’t entering into the conversation right now,” says Crisafulli. “Many tech names are trading well beyond where they should even under the most optimistic conditions.”

KEY BACKGROUND

Bespoke Investment Group describes the surge in tech stocks as the third act of the current bull market, which began when the market rebounded from its low on March 23. While investors first bought into “stay at home” stocks in tech and energy, that was followed by a period led by “re-open” stocks in travel and retail. “But since June 8th, we’ve seen the broad S&P trade sideways as ‘re-open’ stocks have paused or pulled back again, and only the tech/FAANG names are working,” the firm said in a note, adding, “the rest of the market has actually been pretty darn weak.”

WHAT TO WATCH FOR

If big tech stocks continue spiking as they have in recent weeks, “it will be nearly impossible” for the S&P 500 to suffer a sustained decline, Crisafulli predicts. “However, banks and industrials provide more insight into the state of underlying economic fundamentals and both groups are struggling.”

Must Read

error: Content is protected !!