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Tech Rally Powers Record Gains for Stocks

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07/21/2019 | 05:45am EDT

By Amrith Ramkumar

The biggest technology companies are propelling major U.S. indexes' record run, highlighting investor enthusiasm for the hottest stock sector as economic growth softens.

Together, Microsoft Corp., Apple Inc., Amazon.com Inc. and Facebook Inc. have accounted for 19% of the S&P 500's total return this year, according to S&P Dow Jones Indices data through Thursday. That rate is roughly in line with the contributions made by the biggest tech stocks in 2017 and much of last year, before a fourth-quarter reversal helped roil markets.

Giant asset managers including Vanguard Group, State Street Corp. and T. Rowe Price Associates Inc. generally increased their stakes in these firms as well as Alphabet Inc. and Netflix Inc. in the first quarter of the year, FactSet data show.

The concentrated gains contrast with much of the market. Seven of the S&P 500's 11 sectors remain solidly below records, and shares of small companies that stand to benefit if the Federal Reserve cuts interest rates are well below their recent peaks.

The divergence shows investors are putting a premium on assets that offer the prospect of significant growth, which is perceived as scarce with falling rates and lukewarm economic data. Investors in the coming days will weigh second-quarter results from Amazon, Alphabet and Facebook, while Apple is set to report July 30.

"Many people just want them whether interest rates are rising, declining or staying where they are," said Jamie Cox, managing partner at Harris Financial Group, which owns shares of Microsoft and Amazon and has been increasing its position in Microsoft recently.

Fears that trade tensions will slow global growth have kept many investors cautious, pushing them toward the FAANG stocks -- Facebook, Amazon, Apple, Netflix and Google parent Alphabet -- as well as Microsoft. Many view these firms as less dependent on economic activity and attractive because they tend to participate in hot areas for investment such as cloud computing and artificial intelligence.

"If you don't own a core holding in some of the leaders, you might be missing out," said Mona Mahajan, U.S. investment strategist at Allianz Global Investors. "Those few names are probably benefiting disproportionately because they have real growth stories behind them."

At the same time, some investors are keeping an eye on signs the rally might be vulnerable.

Netflix, among the most popular shares in recent years, tumbled more than 10% Thursday after subscriber data in its latest quarter disappointed Wall Street. Fund managers surveyed by Bank of America Merrill Lynch earlier this month ranked U.S. tech stocks the second-most-crowded trade across markets, trailing only U.S. Treasurys. Crowded trades are ones viewed as so likely to pay off that bad news often results in large losses.

"The ones we tend to be a little more leery about are the ones that are growing just because of momentum," said Omar Aguilar, chief investment officer for equities and multiasset strategies at Charles Schwab Investment Management.

The FAANG group and Microsoft are in the top 10% of most crowded S&P 500 stocks, according to an analysis by Ann Larson, managing director of global quantitative research at AllianceBernstein.

Her firm uses a model to assess popular trades that factors in top holdings by active managers, stakes they have been building in the past several quarters, earnings estimates, stock performance and bank analyst ratings. The analysis also shows that technology is currently the most crowded sector.

The biggest tech firms aren't the only ones benefiting. Semiconductor stocks have recovered from a dismal May and climbed in five consecutive weeks even as companies warn that tariffs are hurting their businesses. Shares of smaller social-media companies are rallying in lockstep, with Twitter Inc. up 28% in 2019 and Snap Inc., the parent company of Snapchat, more than doubling this year.

Some of those companies are expected to record losses or slower profit growth moving forward, but investors say their gains illustrate a continuing search for greater returns as global bond yields fall. Yields decline as bond prices rise and have plumbed multiyear lows recently.

The rally is increasing attention on whether stocks are too expensive based on common valuation metrics. The information-technology sector now has a price/sales ratio of 4.6, FactSet data based on revenues in the past year show, while the broader S&P 500 has a ratio of 2.15. Facebook, Netflix and Microsoft have much higher valuations based on sales than Amazon and Apple.

But those concerns have prevailed for years, and some say the time hasn't come to act on them.

"The playbook says invest in higher-quality names during times like these, and people are following the playbook," said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management.

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

Stocks mentioned in the article
ChangeLast1st jan.
ALPHABET 0.85% 1179.21 Delayed Quote.12.85%
AMAZON.COM 0.93% 1792.57 Delayed Quote.18.25%
DJ INDUSTRIAL 1.20% 25886.01 Delayed Quote.10.97%
MICROSOFT CORPORATION 1.83% 136.13 Delayed Quote.31.61%
NASDAQ 100 1.59% 7604.108768 Delayed Quote.20.13%
NASDAQ COMP. 1.67% 7895.993811 Delayed Quote.19.00%
S&P 500 1.44% 2888.68 Delayed Quote.13.59%
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Financials (USD)
Sales 2020 140 B
EBIT 2020 48 023 M
Net income 2020 40 311 M
Finance 2020 69 656 M
Yield 2020 1,44%
P/E ratio 2020 26,0x
P/E ratio 2021 23,0x
EV / Sales2020 6,94x
EV / Sales2021 6,16x
Capitalization 1 039 B
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Average target price 155,12  $
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Spread / Average Target 14,0%
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