There are five major tech companies, which now make up 18% of the stock market. These are famous Apple, Microsoft, Google, Amazon, and Facebook. As experts continue to predict future highs for them, investors are trying to grab the shares as soon as possible. But is it a really good idea? Yes, they are already excessively successful, but if the market doesn’t diversify, there can be dire consequences for those stocks.
When there isn’t a healthy rivalry, the stocks sometimes tend to skyrocket, when in reality, they don’t have sufficient profit. As the difference between stock price and its actual gain becomes too much, the shares begin to fell again. And shareholders lose their money.
Such an occurrence had already taken place in 2000. Microsoft, General Electric, Cisco, Intel, and ExxonMobil comprised 18% of the S&P 500’s market cap then. Investors were so concentrated in tech and cyclical during that time, that they weren’t prepared when the market turned rapidly risk-off. Economic growth also slowed sharply, and the major stocks landed in red.
What is the Expert’s Prognosis?
Goldman Sachs strategist David Kostin warns shareholders to avoid repeating the 2000’s mistakes. It’ll be possible if today’s market cap leaders meet or preferably exceed current consensus growth expectations – noted Kostin. Fortunately, expectations seem more achievable for now due to the recent results and management guidance.
Furthermore, today’s big-cap leaders are aggressively reinvesting in their business to increase profit. According to Kostin’s data, the collective three-year growth investment ratio for today’s S&P 500 top five equals 48% vs. 21% for the broader index.
On the other hand, in 2000, the five largest stocks invested less of their cash flow back into their businesses than the rest of the index (26% vs. 34%). Kostin thinks valuations could prove sustainable for now. Nevertheless, he advises traders to move on the smaller stocks. There is still a chance of a turnaround for the tech giants.