One of the most closely watched parts of the market is the mega-cap tech stocks. These are Facebook (Nasdaq: FB), Netflix (Nasdaq: NFLX), Apple (Nasdaq: AAPL), Amazon (Nasdaq: AMZN), Google (Nasdaq: GOOGL), and Microsoft (Nasdaq: MSFT).
These were some of the most disruptive, innovative, and fastest-growing stocks of the previous decade. Not surprisingly, they also were best-performing stocks and have attained valuations that didn't seem possible a few years ago. Due to their size, they make up a huge portion of the major indices like the S&P 500 (NYSE: SPY) and the Nasdaq 100 (NASDAQ: QQQ).
Recent Developments
These stocks were major outperformers during the initial months following the market bottom in March 2020. They were beneficiaries of people spending more time and money online, and businesses being forced to increase their tech spending with increased remote work.
Thus, these stocks were among the first to make new highs. However, in recent months, they have underperformed and have been largely range-bound. Part of this is a rotation from tech stocks into other parts of the market with lower valuations like cyclicals, financials, and energy.
This is driven by increasing expectations of a strong economy in the latter half of this year and 2022. It's also leading to upwards pressure on interest rates which tends to be a headwind for growth stocks. In these environments, value stocks tend to outperform growth stocks.
What's Next?
Looking ahead, this consolidation is creating a potentially good entry point. For one, the companies have continued to deliver strong earnings growth. Many tech stocks have floundered as they are seeing less spending and time spent on their platforms due to the economy reopening. When high-multiple stocks see slippage in growth, it can lead to major corrections.
However, the mega-cap tech stocks so far are showing little signs of slowing down. Due to their earnings growth and underperformance over the last couple of quarters, many are now cheaper than the S&P 500 on a forward basis. This is despite having faster growth rates and higher margins.
It also seems likely that long-term rates' steep climb is now over. It could certainly climb higher if the economic data keeps coming in above expectations but a lot of good news has already been reflected. Another strong earnings report and a pause in long-term rates could be the catalyst for this group to resume its ascent.