Are Megacap Technology’s Shares Out of Control? Big Tech still has the power to extend the rally and control the economic storm, analysts say

Meanwhile, the Nasdaq Composite

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Gained more than 3% every week. According to FactSet data, the technology-heavy measure has grown by 20.9 percent so far in 2023. That compares with a 9.2 percent year-over-year gain for the broader S&P 500 index.

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and a 0.8% increase for the Dow Jones Industrial Average

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Shares of US tech behemoths will move so far in 2023. Apple Inc.

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This year, the shares have increased by about 35%, making the market capitalization larger than the entire Russell 2000.

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for two weeks, the longest stretch on record, according to Bloomberg data shared with MarketWatch. Meta Platforms Inc.

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It jumped 104.1% year over year and Google parent Alphabet Inc.

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It grew by 39.1%, according to FactSet data.

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MarketWatch spoke to analysts to find out what makes tech stocks a dominant force in the U.S. equity market in 2023, and what challenges they may face this year.

Reversal of 2022 transactions

First, investors have been cautious about undervaluing the tech sector in 2023 after the 2022 bear market, which is “a good starting point for outperforming when you have skeptics who give you a chance to prove a group wrong,” said John Porter, chief investment officer and head of equities at Newton Investment Management.

The Nasdaq composite is down 33 percent in 2022, as the bullish nature of stocks in the tech-heavy index has been driven by interest rate hikes set by the Federal Reserve to combat inflation.

“They’re considered growth stocks, and people are willing to pay higher valuations because they’re expected to grow,” says Mike Dixon, head of research and product development at Horizon Investments. “Looking back year-over-year, they’re not growing, but in terms of expectations, it’s probably a source of income now unless we have very bad growth prospects going forward.”

Strong balance sheet and sustainable sources of income

Megacaps’ results during the last quarterly earnings report were taken as proof that the sector can continue to grow strongly, with their rock-solid balance sheets, strong cash flow generation and solid profit margins.

“They are large companies with diversified revenue bases, no debt, profitable income statements, strong balance sheets,” Olivier D’Acier, head of APAC, said in a phone interview on Friday. “Although they [investors] They are betting on tech, playing on the safe side of technology. they [megatech] He can weather the storm.”

Porter said he has seen a new wave of “price discipline” in some high-tech companies. Their control has translated into faster-than-expected earnings improvements, making their balance sheets and income streams more attractive to investors than other types of stocks, Porter said.

In the year Of the 95% of S&P 500 companies reporting results for the first quarter of 2023, 78% reported positive earnings per share, higher than the 5-year average of 77%, John Butters Sr. Earnings said. Analyst at FactSet.

Fed rate hikes may be over.

Market analysts said signs that US inflation is beginning to moderate and the Federal Reserve is nearing the end of its interest rate hiking cycle have contributed to the technology’s lead.

Fed Chairman Jerome Powell said on Friday that his colleagues think it will take some time to return inflation to the central bank’s 2% target, confirming that the Fed has yet to decide what to do at the June 13-14 FOMC meeting. Dallas Fed President Lori Logan said Thursday that the data points so far do not justify a rate hike in June.

Fed funds futures traders on Friday saw a 16.8% chance of another quarter-percentage-point rate hike by the central bank in June, according to CME’s FedWatch tool.

Big Tech AI Madness

Still, the dominant driver of megacap technology over the past six to eight weeks has been artificial intelligence (AI), Porter told MarketWatch in a phone interview on Friday.

“We’re in a big conversation cycle around AIA, which has created a halo around a number of key stocks in the technology sector, and that was icing on the cake,” Porter said.

For example, investors into Nvidia Corp. They flooded.

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This year, the chip maker’s stock is up 113.9% through 2023. NVIDIA founder and CEO Jensen Huang predicts that revenue from artificial intelligence platforms will grow significantly over the next 12 months as businesses move forward with AI or stay behind.

Meanwhile, Microsoft Corp.

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This year, the stock is up 32.7% and AI provider C3.ai

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It exploded 125.9% over the same period, according to FactSet data.

David Russell, vice president of market intelligence at TradeStation, said: “Investors are likely to see significant AI gains and growth. “We have new business, new products, which means higher profits and better prices. We are entering a market where the market is moving away from cloud-computing, cloud migration and e-commerce. [AI] It’s a game changer.”

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Is Megacap Technology Overpriced?

However, Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, said that even a company like Microsoft was trading at a price-to-earnings ratio of 33 at the end of April, when tech stocks were “extremely overvalued.” It’s expensive for us for a company that isn’t growing revenue by more than a third multiple,” he wrote in emailed comments.

“We don’t mind paying for growth, but we don’t mind paying too much for less growth,” he said.

Big Tech remains the largest balance sheet in the S&P 500 index, along with Apple, Microsoft, Amazon.com.

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Nvidia and Alphabet are now over 20% of the large-cap index. The current cumulative weighting represents a significant increase from 17% at the beginning of the year and is slowly approaching the 22.3% level recorded in 2020, said Brian G. Belsky, chief investment strategist at BMO Capital Markets.

“As a result, many investors are more concerned about the impact this top-heavy focus could have on market performance, especially if these names start to falter,” Belski wrote in a Thursday note.

However, Belsky and his team admit that this focus is not detrimental to performance. The chart below shows that the range of performance tends to increase over the six- and 12-month periods with significant increases in market-cap stocks, as a percentage of stocks outperforming and improvements in the value of the S&P 500 Equal-Weighted Index.

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Performance breadth usually shows the number of stocks in a particular stock index that are declining versus those that are declining. The increasing market size is when many stocks are decreasing.

look out The S&P 500 is heavily weighted in technology. Here’s what it says about future stock market returns.

To be sure, the megacaps’ continued rally in tech doesn’t suggest they won’t be pulling back anytime soon, as their biggest strength could be their biggest weakness, market analysts warn.

“The bigger short-term risk may be more macro than micro,” said Porter of Newton Investment Management, citing debt ceiling negotiations in Congress and uncertainty surrounding the Fed’s aggressive monetary tightening cycle.

“Let’s dream for a moment that cool heads prevail and Washington realizes that they have to put their own personal agenda outside of your politics and do what’s right for the country.” That [debt-ceiling deal] Hopefully it will, but if not, this is a source of flexibility,” Porter said.

“We need to continue to look at trends and economic data and find a solution to this debt ceiling in the near future…. And if we get part of it out of the way, I think the rest of the market can participate [in the rally]” Dixon at Horizon Investments told MarketWatch by phone.

US stocks ended the week slightly higher with the Dow industrials gaining 0.4% and the S&P 500 gaining 1.7%.