For the better part of the past decade, mega-cap tech companies like Facebook, Amazon, Netflix, and Google have dominated the rest of the market and helped push major indexes higher.
One Wall Street market expert lays out a compelling case for why the sheer and utter dominance of the tech elite could be on its last legs.
He also discusses an interesting historical dynamic called “the winner’s curse,” which suggests that — on a long-term basis — investors are better off avoiding the market’s biggest stocks entirely.
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The mega-cap tech elite have been so dominant over the 10-year equity bull market that they’ve been given a handy acronym: FANG, which is short for Facebook, Amazon, Netflix, and Google.
Variations of FANG have swirled, featuring everything from FAAMG (including Apple) to FAAMG (featuring both Apple and Microsoft). But regardless of which one you prefer, there’s one undeniable truth underlying it all: This tech cabal controls the fate of the broader stock market, for better or worse.
Despite how you feel about these tech titans wielding so much influence, their performance makes some sense. They offer incredible sales and profit growth. Their products and services are used by nearly everyone. And, perhaps most importantly, they’ve been able to adjust to changing conditions and head off competition.
That’s resulted in a situation where investors have continued to pile headfirst into these stocks, even as traditional valuation measures have gotten historically stretched. The growth potential of these companies seems endless at times, so why constrain your upside by clinging to outmoded metrics?
Read more: ‘Entering the danger zone’: One Wall Street expert lays out a compelling case for a stock-market meltdown in May
Vincent Deluard, a macro strategist at INTL FCStone, is here to challenge the idea that these stocks will be indefinitely invincible. The way he sees it, there are three main hurdles facing the tech Illuminati. And they’re serious enough to spur underperformance in the group going forward — something previously thought unthinkable.
(1) They’re simply too big to keep growing this fast
The logic here is simple, albeit largely ignored by investors who continue to pile into mega-cap tech: As a company gets bigger, it becomes increasingly difficult for it to grow at the same pace.
“The law of physics conspire against mega-caps,” Deluard said in a recent client note. “Just as thermodynamic systems eventually drift towards chaos, competitive advantages are usually lost, inventions are copied, trade secrets are discovered, corporate ethos are eroded, and market-leading firms eventually revert to mediocrity.”
Deluard notes that the competitive advantage enjoyed by the tech elite has already started to erode. According to his data, the combined sales of Apple, Google, Amazon, and Facebook grew by 10.7%, compared to 8.2% for the S&P 500. That marked the smallest gap since the tech bubble of 2000.
(2) …read more
Source:: Businessinsider – Finance