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These 5 Tech Stocks Are Driving The Market to Record Highs – Nasdaq


As the market continues to hit new highs, some are beginning to question whether we are poised for another tech wreck.

Morgan Stanley recently noted the five biggest companies now dominate the S&P 500 to such a degree that they account for nearly one-fifth of the index’s total market cap. Not even during the dot-com bubble of 2000 was there such disparity — and it raises the prospects of a stock-market collapse when the music finally stops.

Green bull alongside a rising stock chart

Image source: Getty Images.

The five fingers of growth

Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), Amazon.com (NASDAQ: AMZN), and Facebook (NASDAQ: FB) account for 18% of the stock market and have collectively been the driving force behind the phenomenal bull market that saw the S&P 500 gain 29% in 2019 and end the year at its highest level ever.

^SPX Chart

^SPX data by YCharts

That it’s continued to climb in January is causing analysts to get the jitters about what happens when the tech giants are no longer able to maintain their torrid rate of growth. Morgan Stanley’s Mike Wilson told clients: “A ratio like this is unprecedented, including during the tech bubble. Capital concentration is following corporate inequality like never before.”

And though Wall Street is beginning to get nervous about what it all means, it also doesn’t seem as though the party is about to end anytime soon.

Apple

Apple has been the primary force in the market’s gains, carrying a 4.79% weighting in the S&P 500 and generating over 8% of the index’s gains last year all by itself.

Despite the outperformance, analysts still see Apple gaining even more this year and over the first two weeks of 2020, raising their earnings outlook for the current quarter. Where they originally saw fourth-quarter profits coming in at $4.45 per share for the period that ended in December, the consensus is now $4.53 per share. Revenue of $87.7 billion at the midpoint of forecasts is some 4% ahead of what Apple reported a year ago.

At a current price of $314 per share, which gives Apple a $1.36 trillion market cap and is causing analysts to almost have to update their price targets in real time, there is an argument being made that with the advent of 5G mobile phone upgrades, a $2 trillion valuation is not only not implausible, but probable. There’s no end to the growth forecast for Apple’s iPhone.

Microsoft

Tech leader Microsoft also carried a lot of weight for the market index in 2019, having a 4.55% weight and generating 6.6% of its returns. Together with Apple, the two companies accounted for nearly 15% of the total index performance.

Cloud computing and Microsoft’s Azure platform is one of the big reasons it did so well last year, and could easily do so again this time around. There has been a subtle shift by companies away from Amazon on all fronts: Nike and Ikea abandoned its marketplace, and companies are gravitating away from Amazon Web Services (AWS) and finding a home on Azure.

Azure sales were up 59% last quarter, while AWS saw a 35% gain. Having also won a Defense Department contract for cloud services, which Amazon is now challenging in court, Microsoft could see more enterprise-level contract wins, and maybe additional government awards.

Alphabet

Despite increasing government and regulatory scrutiny of its practices, Alphabet had a banner year last year, outpacing the gains of the market. Its weight in the S&P 500 is 3.19%, and though its returns didn’t represent such a large swath of the marker’s performance, it still helped lift the overall total.

New CEO Sundar Pichai is viewed as a positive driving force for the tech conglomerate in 2020, as Alphabet continues to monetize search. Analysts have been raising their outlook for the company as they did with Apple and acquisitions like Alphabet’s just-announced deal for Pointy, which helps brick-and-mortar retailers track inventory in real-time and display pop-up screens for consumers when they search online for a product, could lead to more gains ahead.

Amazon.com

Although Amazon.com was the only one of the Big Five to see its stock not beat the market index in 2019, its 23% gains were still a positive result and 2020 just might be even better.

As noted above, AWS is seeing some stiff competition for business, but that doesn’t mean it’s failing. And analysts expect it, along with its advertising business, which has been cutting deeply into Google’s share for years now, to expand margins for Amazon this year.

Its U.S. retail business is also now reliably profitable, meaning AWS no longer has to carry all the weight by itself. And as Amazon expands further into international markets, that segment should see greater improvements as well. 

Facebook

Social media giant Facebook had a banner year as well, coming in second only to Apple and landing ahead of Microsoft with a 56% return. Powered forward by momentum generated with user engagement, sales, and earnings, Facebook has planted the seeds for a stellar 2020.

Its networking site obviously is the big public face of the company, along with ancillary apps like Instagram and WhatsApp. But it runs a multifaceted business that generates considerable revenue from its digital ad space, e-commerce platforms, so it’s easy to see why Wall Street also keeps upgrading its outlook for Facebook for the coming year.

Risks abound

Of course, as the stock market reaches a crescendo and becomes top-heavy with just a few issues representing an increasing percentage of its gains, the probability of a hard landing intensifies.

All bull markets come to an end. And while this one will as well, there seems to be more catalysts for these individual stocks to keep growing in 2020, meaning a crash still seems remote.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, Microsoft, and Nike and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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