Investors looking to avoid sectors vulnerable to inflation, Fed policy uncertainty, and glum coronavirus news can turn to a familiar friend: Domestic large- and mega-cap technology stocks.
The S&P 500 Index, dominated by mega- and large-cap names, is sitting near record highs and is on pace to post its sixth-straight monthly gain in July.
While tech is a growth sector and one that’s economically sensitive, it’s long been a shelter from storms, and a destination for investors looking to remain invested in equities while avoiding macro headwinds.
“Since the financial crisis, investors have returned to the ‘comfort blanket’ of large tech stocks in periods of uncertainty,” writes Nationwide’s Mark Hackett. “This is understandable, given that these firms have consistently beat expectations, have multiple levers for growth and enjoy strong balance sheets and cash flow generation.”
As the sector with the largest weighting in the S&P 500 Index, technology is perennially relevant. It also has a history of rebounds following periods when cyclical stocks gain favor with investors, as has been the case for much of 2021.
“Any periods of underperformance, like the one between September 2020 and June 2021 when cyclical stocks came into favor, are followed by a quick rebound. Over the past decade, the S&P 500 has returned 226%, which is impressive until you consider the 962% cumulative return of these mega-cap tech stocks,” says Hackett.
As Hackett notes, investors should understand what they’re getting with broader tech funds and broad-based domestic equity gauges for that. In the case of the latter, it usually means heaping helpings of tech.
“The return of investors to the mega-cap tech stocks has powered this shift. The big five technology-related companies—Apple, Microsoft, Amazon, Alphabet (Google), and Facebook—have outperformed the S&P 500 by 9% since early June. These companies are also the largest stocks in the S&P 500, so they are also driving the performance of the broad equity market,” he said.
Apple, Microsoft, Amazon, Alphabet and Facebook currently account for about 23% of the S&P 500 Index’s weight.
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