Big Tech Shares Dent Stock Market Recovery
Stocks fell sharply Thursday, clawing back some of the extraordinary gains that major indexes had made over the summer, as investors shifted out of the large tech-oriented companies that had pushed the market higher in recent weeks. Separately, official data showed that the COVID-19 pandemic continues to sap the economy’s strength, with jobless claims remaining high as August wound down, despite a modest improvement from earlier in the month. The broad S&P 500® Index ended the day 3.5% lower, while the blue-chip Dow Jones Industrial Average lost 2.8% and the tech-focused NASDAQ fell almost 5%.
“The five companies investors generally refer to as ‘Big Tech’—Amazon, Apple, Google/Alphabet, Facebook, and Microsoft—received much of the attention in what has turned out to be the fastest stock market recovery in history,” says Liz Ann Sonders, Schwab’s chief investment strategist. “These companies represent just 1% of the stocks on the S&P 500, but now account for nearly a quarter of the index’s market capitalization. This kind of concentration poses a risk, especially when many of the other stocks on the index aren’t performing nearly as well.”
“At the same time, investor sentiment had become frothy, and today’s decline may not be enough to ease all of that speculative froth,” she adds.
For further evidence of how relying on just a few of stocks to drive a recovery can create vulnerabilities, just look abroad—international stocks outperformed U.S. stocks during the selloff.
“In general, valuations for international stocks have been lower than for U.S. stocks, and international stock performance hasn’t been driven by a handful of stocks, unlike in U.S. markets,” says Jeffrey Kleintop, Schwab’s chief global investment strategist. “Additionally, international stock indexes tend to contain relatively fewer Information Technology stocks, which underperformed, and relatively more Financial Services stocks, which outperformed.”
“International stocks tend to skew more toward cyclical companies than U.S. stocks do,” Jeff says. “This could be a boon if the economic rebound broadens beyond companies that benefit from stay-at-home orders to include other companies.”