Tech Megacaps resume storming to derail inventory turnover

Tech Megacaps resume storming to derail inventory turnover

Just as the risky little outsiders of the US stock market were finally enjoying a historic turnaround, megacap security trading came back in force.

The Nasdaq 100 rallied over 1% at Monday’s opening, beating benchmarks such as the Russell 200 and the S&P 500. Last week, as Netflix Inc. won with 200 million subscribers amid the boom Of the stay at home, the top five tech companies notched their best performance in nearly three months.

Fueled by the confidence that people like Apple Inc. will hit their profit targets in the coming days, the Nasdaq 100 is now flirting with new records – once again showing the ten-year folly of doubting the power of Big. Tech.

It’s a failure for investors who have erased the era of the stock market giants, believing that companies linked to the US economy should outperform. Small caps have been almost the highest relative to their larger counterparts for almost two years. A long-short value strategy is on track for a fourth consecutive month of gains – the longest streak since 2016.

Last week’s gathering underscored the tenacity of tech giants to strengthen their market leadership. But with large companies trading at historic prices, a brewing rebound in the business cycle should send money rushing into smaller stocks, the argument goes.

“If economic activity withstands the recent Covid wave, the slow growing trades that worked last week will reverse and the reopening of stocks will outperform,” the Evercore ISI strategists led by Dennis DeBusschere wrote in a note. .

At the same time, ever higher premiums for mega-caps may be increasingly difficult to justify, according to Lawrence Hamtil, co-founder of Fortune Financial Advisors.

It highlights the gap between their market value and their income. Tech is 28% of the S&P 500, but 22% of its projected earnings for 2021, according to data calculated by Bloomberg. Consumer discretionary, which includes Tesla Inc., accounts for 13% of the value of the U.S. index, but 7% of its earnings.

“Perhaps the risk is that once the virus is dealt with and a semblance of normalcy returns, the rest of the market, like energy and finance, will catch up,” he said.

In the S&P 500, value stocks – cheap names that tend to be more cyclical – are expected to increase profits by 26% this year. That compares to 22% for growth names, a group that generally includes technology, according to estimates compiled by Bloomberg.

Reality check

The dominance of certain sectors may no longer be justified by profits

Source: Bloomberg calculations News based on earnings estimates compiled by Bloomberg Intelligence

Inventory gains have been concentrated in recent years thanks to the reliable profitability of Facebook Inc., Apple, Amazon Inc., Microsoft Corp., Netflix and parent company of Google Alphabet Inc.

Low rates and sluggish economic growth also favor these stocks because they look like long-lived assets less tied to the business cycle. So while cyclical stock earnings may rebound strongly this year, they still don’t match the long-term profit promise of tech stocks.

All of this means that the megacaps could get even bigger.

With the pandemic only deepening reliance on technology, the top 10 companies – which are almost all in the industry – hit 27% of the S&P 500 at the end of last year, the highest for at least three decades. Amazon, Apple, and Microsoft accounted for roughly half of the index’s gains in 2020.

Heavy top

The US benchmark is more concentrated than it has been in decades

Source: S&P Global year-end data calculated by Bloomberg News

But a purse with a broad base …

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