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Tech’s impact on markets obscures point-com bubble height



Technology companies are poised to end the year with their largest share of the stock market ever and top a dot-com era peak in the latest illustration of their growing impact on global consumers.

Companies that do everything from phone production to social media platform operations now account for nearly 40% of the S&P 500, as a darkening record of 37% from 1999, according to a Dow Jones Market Data analysis of annual market value data goes back 30 years. Apple Inc.,

which earlier this year became the first US company to have a market value of $ 2 billion, accounting for more than 7% of the index alone. Early last month, it accounted for 8% of S&P, the largest share ever of any stock in data dating back to 1998.

S&P 500 share of total market value by sector

Industrial

and materials

Industrial

and materials

Industrial

and materials

Industrial

and materials

Despite a recent retreat in popular tech stocks like Apple and Netflix Inc.,

many of these companies are still among the market leaders in 2020, strengthening the S&P 500 to a near 8% gain for the year and keeping it close to all highs during the coronavirus-induced economic downturn. Technical stocks lifted the markets early in the past week before pulling them down later, highlighting their volatility over the major stock indices.

Trends like telecommuting and cloud computing are driving growth in these companies and helping technology companies expand their business when many are struggling. Yet the concentration of gains in a narrow group of companies concerns many investors who are concerned that equities are too dependent on the sector and that a significant withdrawal in a few names could bring markets down.

Previous peaks in a sector’s influence on the S&P 500 have preceded sales. The technology sector tumbled after the dot-com bubble burst. The banks’ influence on markets peaked in 2006 ahead of the financial crisis, and energy stocks slipped after hitting a new high in their index in 2008.

Few analysts say tech stocks are as overvalued as they were two decades ago, with robust earnings growth and near-zero interest rates justifying much of the group’s recent rise. But many investors support more volatility in a sector that has grown remarkably fast, pulling the rest of the market along with it.

“We’ve had a mandated digital lifestyle,” said Alison Porter, a portfolio manager focusing on the sector at Janus Henderson Investors. She remains confident of the largest technology companies due to their reliable growth and prominent place in people staying at home during the pandemic.

Investors this week will monitor the next round of third-quarter earnings from companies including Netflix, as well as the latest figures on weekly jobless claims to measure the economy.

Because Congress has not adopted further stimulus measures, many traders are still reluctant to favor parts of the market that are more directly linked to economic growth. It also held true throughout the slow but robust expansion that ended earlier this year. While data shows that the tech giants employ fewer workers than some other former market leaders, they do invest heavily in their business and allow other businesses and consumers to buy and sell goods and services more efficiently.

Howard Marks, co-founder of investment firm Oaktree Capital Group LLC, said in a recent note to clients that measurements of how expensive technical stocks are relative to current profits could actually underestimate the potential of these companies because they spend so much on operating their rapid growth.

Analysts estimate that the technology sector’s share of S&P 500 corporate profits could reach 36% this year, FactSet data shows. The information technology sector has a price / earnings ratio of 28 based on the Group’s profit from the past year compared to a ratio of 24 for the S&P 500. Communications service companies trade at 25 times earnings, while Apple, Microsoft Corp.

, Facebook Inc.

and the alphabet Inc.

have valuations in the mid-30s. Netflix’s ratio is around 90, while Amazon.com Inc.’s

is about 130.

Even for more expensive Internet companies, many investors are willing to pay for their rapid growth.

“They’ve been given an extra boost over the last 10 years because the broad economic background has been dull,” said David Lebovitz, a global marketing strategist at JP Morgan Asset Management. He recommends that clients prefer companies in the sector that are not as expensive as the most popular internet stocks.

At the same time, insane trading in the most popular Internet companies remains a concern for many market watchers. Some of this activity has taken place in options tied to tech stocks. Options give the holder the choice to buy or sell a stock at a certain price within a certain date. Banks and other companies that sell options to investors often then hedge prices that go up or down by trading technical investments themselves, a force that can exacerbate volatility. Japanese conglomerate SoftBank Group Corp.

was a major buyer of tech stock options earlier in the year.

The analysis of tech’s concentration in the S&P 500 is based on companies in information technology and communication services. In particular, this group excludes Amazon, the e-commerce giant that is in the consumer discretionary sector. The inclusion of Amazon, which has a market value of about $ 1.6 trillion, would make the technology sector’s fluctuation across markets even greater.

Because the S&P 500 is weighted by a company’s market value, the largest Internet companies have overshadowed declines in several sectors this year. In another illustration of the group’s strength during the pandemic, S&P surpasses a version of the index that gives each stock an equal weighting of nearly 10 percentage points this year, a gap that would be the highest since the late 1990s.

“The longer this background continues, the longer they will pull away from the package,” said Amanda Agati, chief investment strategist at PNC Financial Services Group, which favors companies more committed to teleworking and learning recently such as technology, health -care- and consumer staple companies.

SHARE YOUR THOUGHTS

What does the future hold for technical equities? Will their dominance in the stock market continue next year? Why or why not? Join the conversation below.

Amazon and other major Internet companies have been under increasing regulatory scrutiny in recent weeks, with a democratically led House of Representatives panel recently finding that Congress should consider forcing technology giants to separate their dominant online platforms from other business areas.

Few analysts expect the biggest technology companies to break up soon, and regulatory action often plays out slowly, but many investors believe regulation could be another source of volatility in the coming weeks.

“The only thing that really makes me nervous as a technical bull is the likelihood of government intervention,” said Jacob Walthour, CEO of Blueprint Capital Advisors. Still, he recommends that clients prefer technology stocks, e-commerce companies like Amazon and electric car maker Tesla Inc.

due to their growth potential.

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com

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