Tech stocks may have had the hottest start to 2020 for any sector, but that early success doesn’t come without its own unique set of risks.
Highlighting big tech stocks as the riskiest part of the market, Bank of America Merrill Lynch Head of U.S. Equities and Quantitative Strategy Savita Subramanian called attention to the fact that it has become one of the most crowded trades out there in tech’s massive run higher over the 10-year bull market.
“If you think about it, everybody owns mega-cap tech,” Subramanian told Yahoo Finance at the World Economic Forum in Davos. “What we’ve seen over the last several years is this convergence of hedge funds, long-only mutual funds, pension funds — everybody is searching for growth and they are all — in our data — they are all more overlapped in that small subset of stocks than we’ve seen in the last 10 years.”
Mega-cap giants like Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG) and Facebook (FB) have been able to reach individual record highs on a near-daily basis since sputtering in individual blips of earnings trip ups or disappointing updates for investors over the course of the last year and a half. Only Amazon (AMZN) remains noticeably off its peak, shy of its all-time high by about 9%.
Since 2019, however, Amazon shares have gained about 25%, which lags the overall S&P 500’s 32% gain over that same stretch. Facebook and Microsoft are both up more than 60% since the start of last year, while Apple shares have doubled. The fact that these mega-cap tech names have garnered such attention from such a wide set of investors should be cause for concern if the market hits a pocket of volatility, Subramanian says.
“So just in case there is any sort of event or redemption cycle ... I think those really crowded high-growth mega-cap tech stocks are actually more at risk than other parts of the market that might [traditionally] be considered a little bit more risky,” she said.