NEW YORK Apple's rally to the US $3 trillion market valuation earlier this week has refocused investors attention to the mammoth growth stocks that accounted for a large part of the S&P 500 s gain in 2021, and whether they can continue pushing the index higher in the new year.
Microsoft, Apple, Nvidia, Alphabet and Tesla accounted for nearly a third of the S&P 500's total return last year, according to data from UBS Global Wealth Management. The bank said that is more than double the average contributed by the index's five largest gainers since 1985. The S&P 500 returned 28.7 per cent last year, including dividends.
The S&P's meteoric rise has been caused by the explosive growth delivered by giant tech-focused names over the past decade. Some investors worry that big tech stocks may have a harder time delivering big gains this year, because of stretched valuations, expectations of higher Treasury yields and a more hawkish Federal Reserve.
The S&P 500 tech sector's forward price-to- earnings ratio is near its highest level since 2004, and well above the 21.3 of the broad market, according to Yardeni Research. Nvidia trades at 56 times forward earnings while Tesla is part of the consumer discretionary sector, trading at 119 times forward earnings.
Saira Malik, chief investment officer at Nuveen, said that rich valuations could make those stocks more vulnerable to higher yields, with the Fed expected to raise rates several times this year.
She said that the broad returns in tech we've seen in the past year have been based on supportive monetary policy that we won't see in 2022.
The sometimes fraught relationship between higher yields, which threatens to erode companies' future earnings and technology stocks, was on display Tuesday when bets on US economic strength fueled a rise in Treasury yields and boosted shares of energy companies, banks and industrials, while weighing on tech stocks.
Tech stocks had a rough day on Wednesday, with the Nasdaq Composite Index falling 0.7 per cent.
As business and leisure travel bounces back, Malik is focusing on energy companies like Pioneer Natural Resources Co, which she expects to benefit from rising demand for jet fuel, as they hold positions in giant tech stocks that have lagged the broad market, including Amazon.com Inc.
Malik believes that there's going to be more dispersion in the market as returns become broader and Covid variants have less impact on mobility.
Easing worries over the Omicron wave could sap demand for tech stocks, said Scott Wren, senior market strategist at Wells Fargo Investment Institute.
Tech stocks have acted as a haven for investors due to COVID 19 worries, while many companies in the sector have benefited from the stay-at- home trend of the last two years because their earnings are less sensitive to economic fluctuations.
While he thinks technology stocks will keep pace with the market, Wren is overweight industrial stocks that should benefit from infrastructure spending in the United States.
On Tuesday, UBS wrote that big technology companies no longer look as attractive as smaller companies that don't focus on consumers.
We no longer see mega-caps as the best place to look for outsized returns in the tech sector. Their report noted that they expected more value from artificial intelligence, big data, and cybersecurity.
Earnings for the S&P 500 information technology sector are expected to have gone up 15.9 per cent for the fourth quarter compared to a 22.3 per cent rise for the S&P 500 overall, according to Refinitiv IBES.
As the economy rebounded from the coronaviruses, Jack Janasiewicz, a portfolio manager at Natixis Investment Managers, said recent declines in high-value technology stocks suggest investors are increasingly focusing on companies that can pass on rising prices to consumers.
He recently increased his overweights in cyclical sectors such as financials and homebuilders.
He said that we are past the peak of the risk cycle where people were willing to bet on technology names just because they were tech.