Booming technology stocks are test limits of investors’ appetite

So tilted is the ship of stocks toward tech that the index keepers at Standard & Poor’s are about to rearrange the deck chairs to make it seem more balanced. A new communication services sector is being created to capture the old telecom group as well as Old Media and digital-media names including Alphabet, Facebook and Netflix.

The rationale behind the shift is to align similar businesses in a smarter way, while rescuing a tiny telecom sector that was for all practical purposes steered by just AT&T and Verizon.

But it also suggests that too much aggregate market value in internet-related stocks had built up and needed to be dispersed across sectors.

In earlier cycles, index revamps spurred by parts of the market becoming overgrown have occurred near significant inflection points. In late 1999, after years of resisting the pull of Nasdaq stocks, the committee that manages the Dow Jones Industrial Average added Intel and Microsoft. In less than half a year, the market peaked and tech entered a two-year crash.

Less conspicuously, in mid-2001 the S&P index overseers ejected all non-U.S.-based companies (including Inco, Royal Dutch and Unilever), largely because it needed to find space in the S&P 500 for several big recent IPOs — in particular the huge financials Goldman Sachs and Prudential. Foreign stocks would go on to trounce the S&P 500 over the next five years by an average of 3 percentage points annually.

Just being the largest category of stocks in the market doesn’t in itself mean the market has already overdone it and set the group up for failure. The line between big and too big is invisible — and probably always moving depending on changing circumstances.

The elemental underpinnings of tech leadership are clear: Software is indeed overtaking all of business and daily life. Today’s economy, with networks connecting billions of web-enabled devices, produces enormously profitable winner-take-most companies with massive economies of scale and towering profit margins.

Then there’s the fact that — to repeat a corporate-speak cliche — virtually all companies are in some way tech companies today. (In the 1920s bull market, did CEOs and analysts go around saying, “When it comes down to it, all companies are electricity companies now”?) So perhaps citing the dominance of what we classify as tech offers a skewed picture.

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