The Tech Sector is Hot, People Want Exposure, Money Flows
Friday. the top-weighted technology sector (-3.4%) pushed the major averages down Friday afternoon but the S&P 500 show a loss of just 0.1%.
Technology shares have led US stocks to record highs and are expected to continue to rise, but as market value becomes concentrated in the largest companies like the “FAANGs, some money managers are beginning to look for the next group of leaders to extend the rally.
The technology sector of the S&P 500 has risen roughly 20% YTD, led by Facebook, Apple, Amazon, Netflix, Google and Microsoft.
These are the dominant companies in their spaces and the hottest areas in tech. Expect to see money continue flowing into those names. People want to be exposed to the hot areas.
Active funds have continued plow money behind the leaders with a record overweight on the technology sector, according to data going back to Y 2008.
But more than 33% of the Y 2017 gainers in the S&P 500 have come from just 5 companies, and the concentration has some participants, and Friday we say some profit taking but no reversal yet, as the QQQ declined to fill the 24 May gap up and bounced as investors bought the dip.
Given how significant the Big Cap tech leadership has been YTD, participants need to find another group to lead as the money rotates out of the FAANGs.
These new “5 Horsemen” as they have been dubbed have added more than $612-B in value to the stock market YTD. Their Y 2017 gains alone could buy the 85 smallest companies of the S&P 500.
Their combined value, near $3-T, is not far from the market value of all the other components of the Nasdaq 100.
The current rally in tech has come hand in hand with heightened expectations for profits.
Now, investors are paying $18.50 for every $1 in earnings expected over the next 12 months in the sector, compared to the more than $40 they paid during the dot-com bubble and even the $20-plus seen during the most recent market peak in Y 2007.
Tech sector earnings are expected to grow 11% in Q-2 after rising near 21% in Q-1, according to Thomson Reuters I/B/E/S data.
Some of Y 2017’s top-performers YTD sold off Friday posting losses between 2.3% and 3.9% they include:
- Apple(AAPL 148.98, -6.01)
- Microsoft (MSFT 70.32, -1.63)
- Amazon (AMZN 978.31, -31.96)
- Alphabet (GOOGL 970.12, -34.16)
- Facebook (FB 149.63, -5.08)
Chipmakers made matters worse, seen in the 4.3% decline in the PHLX Semiconductor Index. NVIDIA (NVDA 149.60, -10.34) showed weakness (-6.5%) on the day.
However, with gains of more than 33% for Apple, Facebook and Amazon, near 25% for Alphabet and 15% in Microsoft, compared to a gain of 8.5% for the S&P 500, the room for more Northside compressing.
Despite expecting gains upward of 20% for the rest of the year on FAANG stocks, and their ilk, analysts recommend balancing portfolios by rotating into up the year’s under-performers: Banks, Energy and Telecoms. They are looking for opportunity, and will lighten up on the Tech Sector Hotties.
Expect the Financials to lead into that managed money rotation
Notably: Healthcare has lagged the last 18 months. So keep an eye on it too.
- NAS Comp +15.3% YTD
- S&P 500 +8.6% YTD
- DJIA +7.6% YTD
- Russell 2000 +4.8% YTD
|HeffX-LTN Analysis for QQQ:||Overall||Short||Intermediate||Long|
|Bullish (0.30)||Neutral (0.10)||Neutral (0.23)||Very Bullish (0.58)|
|HeffX-LTN Analysis for SPY:||Overall||Short||Intermediate||Long|
|Bullish (0.34)||Bullish (0.26)||Bullish (0.31)||Bullish (0.46)|
Have a terrific weekend.