Royce said that the biggest companies in the S&P 500 normally have a collective market value that’s worth about 50% of the Russell 2000.
“The mega-caps are sort of what everyone has come to think of as the most important enterprises around the world. They are very dominant, very important. They’re very disruptive. So for good reason they’ve achieved a global status. But I think they’re in a kind of bubble as to their specific stock market performance,” Royce said.
So what would happen to the broader market if investors soured on any — or all — of these tech stocks? That would be a big problem.
The bigger they are the harder they fall?
“I don’t think you can ignore the fact that the market has skewed so much towards tech. Amazon and other big techs do benefit from so much money flowing to passive ETFs,” said Adam Phillips, director of portfolio strategy at EP Wealth Advisors. “If there is a sudden stock sell-off, then big techs have more risk.”
Mark Hackett, chief of investment research at Nationwide, agrees.
That didn’t end well. For those with short memories, by the end of April 2000 the Nasdaq had lost almost a trillion dollars worth of stock value when the dot.com bubble burst.
“Every time there is a crash, the sectors that flew the highest then fell the hardest,” said Lindsey Bell, chief investment strategist with Ally Invest.
There’s another problem today. In addition to giant tech companies dominating the big indexes, the top market performers this year are mainly tech stocks, too.
With so many big tech companies trading in such rarefied air, it may be tougher for them to generate strong enough earnings gains next year to keep the current rally going.
Investors are usually looking ahead — not in the rear view mirror. What a stock is worth today is largely a bet on what investors think will happen with sales and profits in the future.
Crit Thomas, global market strategist of Touchstone Investments, thinks earnings estimates for big tech and the broader market are currently too high.
“We’re not really seeing analysts bringing down 2020 earnings forecasts yet,” Thomas said. “We’re not expecting Armageddon or for the numbers to be negative. But 10% earnings growth expectations may be too much.”
Techs have soared because they deserved to do so
“Investors have been focused on tech for good reasons. It’s very hard to dismiss a sector like tech because of what it’s done for the market for the past few years,” said Yousef Abbasi, director of US institutional equities and global market strategist with INTL FCStone.
If investors start to question the growth prospects of tech companies, Abbasi added, they may simply shift more money into other more traditional value-oriented sectors like energy, health care, industrials and financials.
In other words, a tech sell-off wouldn’t necessarily lead to a massive market slide because other stocks would pick up the slack.
“Tech could underperform but the broader market would still hold up,” Abbasi said.