How Apple and Microsoft could blow up the stock market

Microsoft ( MSFT ) Apple ( AAPL ) Amazon (] AMZN ) Google Owner Alphabet ( GOOGL ) and Facebook ( FB ) are the largest companies in America , with a total market value of $ 4.5 trillion.
This means that popular passive index ETFs such as SPDR S&P 500 ( SPY ) and Invesco QQQ Trust ( QQQ ) tracing the Nasdaq-1[ads1]00 disproportionately skewed towards the technical sector.
To put into context how gigantic these tech titans are, consider this: Microsoft and Apple, which are now worth around $ 2.1 trillion in total, represent almost the entire $ 2.2 trillion market capital of all companies in Russell 2000 [19659002] ( RUT ) noted small-cap index Chuck Royce, chairman and portfolio manager of small-cap investment firm The Royce Funds, in a recent Royce Funds video.

Royce said that the largest companies in the S&P 500 normally have a total market value worth around 50% of Russell 2000.

"Like mega capsules, everyone is thought of as the most important companies around the world. They are "Very dominant, very important. They are very disruptive. So for good reason they have achieved global status. But I think they are in a kind of bubble regarding their specific stock market performance," said Royce.

So what would happen to the broader market if investors acquired some – or all – of these tech stocks? That would be a big problem.

The bigger they are, the harder they fall?

"I don't think you can disregard that the market has shifted so much towards tech. Amazon and other big technologies are taking advantage of so much money flowing to passive ETFs," said Adam Phillips, director of portfolio strategy at EP Wealth Advisors. "If there is a sudden sale of shares, big tech companies are at greater risk."

Mark Hackett, head of investment research at Nationwide, agrees.

"The market today reminds me of the late 1990s "," Hackett said, referring to the dot-com bubble, when even unprofitable Internet companies rose sharply. And stronger companies had price-to-earnings that were also astronomical. In March 2000, Cisco ( CSCO ) P / E of 150 and Qualcomm & # 39; s ( QCOM ) was just under 170.

It By the end of April 2000, Nasdaq had almost a trillion worth of axes for those with short memories ever since the bubble burst.

"Whenever there is a bang, the sectors that flew highest would then fall hardest," said Lindsey Bell, chief investment strategist at Ally Invest.

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There is another problem today. In addition to giant technology companies that dominate the large indices, this year's top providers are also mainly tech stocks.

Chip equipment company Lamb Research ( LRCX ) has almost doubled this year, making it the best performer in the S&P 500. The second and third best The S&P 500 stock is its rival KLA ( KLAC ) and semiconductor manufacturer AMD ( AMD ) both up more than 80%.

With so many big tech companies trading in so rare airs, it may be tougher for them to generate strong enough earnings gains next year to keep today's race going.

Investors usually look ahead – not in the rearview mirror. What a stock is worth today is largely a bet on what investors believe will happen with sales and profits in the future.

Crit Thomas, global market strategist for Touchstone Investments, thinks big tech revenue estimates and the broader market are currently too high.

"We don't really see analysts bringing down the 2020 earnings forecasts yet," Thomas said. "We don't expect Armageddon or the numbers to be negative. But 10% earnings growth expectations may be too much."

Techniques have risen because they deserved to do it

Still, it's difficult to overlook the speed of technology. Facebook and Apple both reported strong revenue this week. Microsoft continues to gain ground in the lucrative cloud computing business.
Even Netflix ( NFLX ) who has been concerned about increased competition in streaming from such people as Amazon, Apple and Disney, has had a nice pop in it last after the company reported better-than-expected subscription gains for the third quarter.
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"Investors have been focused on technology for good reasons. It's very difficult to dismiss a sector like tech because of what it's done to the market for the recent years, "said Yousef Abbasi, director of US institutional equities and global market strategist with INTL FCStone.

If investors begin to question the growth opportunities for technology companies, Abbasi added, they could simply move more money to other more traditional value-oriented sectors such as energy, health care, industry and the economy.

In other words, a technical sale would not necessarily lead to a massive market fluctuation because other stocks would pick up the slack.

"Technology may underperform, but the broader market will still hold up," Abbasi said.

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