Amazon, Apple, Facebook, Google, and Microsoft Make Up a Percentage of the S&P 500

“I think the [tech] bubble has stopped inflating, but now it’s a question of when it starts deflating. They Key consideration is where do people go if not into tech—and there’s no obvious candidate.” - Adam Crisafulli (Founder of Vital Knowledge)

Since the dotcom boom, tech giants like Amazon, Apple, Facebook, Google, and Amazon have seen their valuations hit their highest levels, with a flood of investors pumping their money into these large-cap tech companies. While this seems like a competitive advantage for these companies, some experts warn that too much market concentration in selected stocks could have downside risks.

These five large-cap stocks immensely contributed to the stock market’s coronavirus rebound in March. After showing much potentials to perform well in the market despite uncertainties arising from the coronavirus, many investors piled their money into these large-cap tech stocks. For many investors, it is safer to invest in these big companies, as they [the investors] have assurance for steady profits and revenue despite the uncertainties surrounding the coronavirus pandemic.

In recent months, shares of Amazon, Apple, Facebook, Google, and Microsoft are soaring at highest levels, and are leading the market. Together, these companies trade at 34.4 times in their earnings, in comparison to the dot-com bubble of 2000, which had the biggest five companies at the time trade at nearly 47 times earnings, according to Jonathan Golub, Credit Suisse’s chief U.S. equity strategist.

This handful of mega-cap tech stocks also make up a chunk of the S&P 500. Although the S&P is generally down 1% for the year, Facebook and Google have increased more than 10%, Apple and Microsoft have jumped 25%, while Amazon has gained 57%. Together, these five company stocks make up 22% of the S&P 500 Index, today.

This has raised a lot of concerns on Wall Street about the too much market concentration given to these stocks. The reasons for this concern mostly has to do with the fact that a slight drop in any of this handful of stocks may pull down the entire market, as seen in a pattern that has already been playing out in recent times.

“The fact that these big tech stocks have been so strong is a sign of caution in the market – investors aren’t buying reopening stocks like airlines and cruises, for example,” said founder of Vital knowledge Adams Crisafulli. “It’s not a sign of optimism…investors are looking at big tech stocks like they used to look at utilities: Strong business models and growth opportunities that are so vast that they will continue to thrive in this uncertain landscape.”

The sharp rise of mega-cap tech companies this year has in a significant way been driven by a wave of retail investors. Earlier this year, other large-cap were valued above big tech companies, until March, when the market tanked and investors flooded high-growth, mega-cap tech stocks, according to Pierce Crosby, general manager at TradingView. In the last couple of months, especially in June, big tech companies have been driving the market.

Analysts like Golub believe that market concentration is the least thing to worry about as there are other things to worry about.

“There’s lots to worry about these days including an increase in COVID-19 cases, a strained relationship with the world’s #2 economy, ballooning deficits and the potential for higher taxes,” he said in a note.