The US technology giants have a very strong weight in many stock market indices in which private investors also invest. Doubts are growing on the market as to whether the enormously high valuations of the big tech companies can still be justified.
Meta’s securities have been particularly hard hit over the past month.
Some big tech stocks have taken a beating lately. Stock marketers at Microsoft were disappointed with the company’s business outlook, profits at Google’s parent Alphabet were falling, and at Facebook’s Meta there were doubts about the development of the virtual “metaverse”. At the online retail giant Amazon, investors were dissatisfied with the sales outlook.
Microsoft’s share price has fallen by around 3 percent over the past month, and Alphabet A stocks have fallen by almost 5 percent. Amazon shares lost almost 14 percent in value, and Meta shares were hit particularly hard, falling around 30 percent.
High concentration in US big tech stocks
However, the price losses of these shares do little to change the concentration of US technology stocks in common stock market indices. This is shown by a look at the composition of capital-weighted barometers such as the US standard values index S&P 500 or the “world stock index” MSCI World.
These barometers are also widely used in the investment portfolios of private investors and savers. They hope to have a diversification effect by investing in index funds and exchange-traded funds (ETF) that track the development of the S&P 500 or the MSCI World. With the purchase of a product on such a stock market index, you buy several shares at once. As a result, the risks involved in investing are better spread than when you buy a few individual shares.
However, as a look at the current composition of the indices shows, US technology stocks continue to be very dominant in them. In the iShares Core S&P 500 ETF investment product, Apple had a weighting of 7.1 percent as of October 25, Microsoft 5.8 percent and Amazon 3.3 percent. Alphabet A shares had a weight of 1.9 percent and Alphabet C shares had a weight of 1.7 percent.
Even in the MSCI World, which maps the stock markets of 23 industrialized countries, the US technology giants have a massive weight despite the recent price losses: Apple had a 4.9 percent share of the index as of October 26, Microsoft 3 percent, 4 percent. Amazon has 2.2 percent, Alphabet A has 1.2 percent and Alphabet C has 1.1 percent. In addition, US stocks had a weight of around 70 percent in the index at the end of September this year.
“Big risks for private investors”
“The market concentration on big tech is currently even greater than that on technology stocks shortly before the new economy bubble burst in 2000,” says Tatjana Puhan, deputy investment manager at wealth manager Tobam. This is a big risk for investors. If the concentration on these few stocks from the same industry breaks down, there is a risk of significant losses in the indices.
With the geopolitical tensions, the Ukraine war, the sharp rise in inflation and the rate hikes by the central banks, market concentration has decreased somewhat this year, says Puhan. Since these trends are likely to continue for the time being, a further reduction in concentration is to be expected. “Investors have begun to question whether US technology companies’ extremely high valuations are still justified.”
After some disappointing earnings news for these companies and a clouded outlook for their business, the last few days have shown how severe the impact can be if the still extremely highly valued big tech stocks start to correct. “As in the case of Meta, the market capitalization can easily lose hundreds of billions in one day,” says Puhan.
You have to differentiate between the big tech titles, says Ali Masarwah, partner at the fund platform Envestor. “Meta has been on a bad run for months. Doubts about the business model are increasing.” The situation is different for Microsoft, Alphabet and Apple, which have held up very well so far. But this is about to change, says Masarwah. The situation reminded him of that of the “Nifty Fifty”, a group of around 50 large US standard stocks that had long resisted the downward trend in the 1970s, but which finally got hit hard. “Apple has eluded the trend so far, but no business model is immune to a recession,” says Masarwah. It can currently be observed how the correction “eats” into the first row.
USA as a haven of stability
Numerous scientific studies have shown how difficult it is for investors to beat capital-weighted stock market indices with their investment decisions. This is likely to remain difficult in the future.
However, Puhan recommends good diversification. In addition to products on indices such as the MSCI World and the S&P 500, private investors should focus on sectors and countries that are less well represented in these barometers. In the case of the economic sectors, for example, utilities or healthcare stocks could be considered here. Alternative weighting approaches that do not weight according to market capitalization but focus on risk concentrations and thus avoid overweighting US big tech stocks are also available to private investors in the form of index products.
In terms of regions, an alternative could be to cushion the great weight of the USA. But Masarwah advises caution here. Classic world stock indices are very US-biased, but investors have been taught better in the past with warnings of US concentration. “The US is a haven of stability, and that’s always true for interest-bearing securities and the dollar,” says Masarwah. However, it can be argued that weighting a country more than 65 percent in an investment portfolio is too much.