Early this week, technology shares saw a sell-off across the sector after an analyst downgraded Apple (AAPL) stock from Buy to Neural. Prior to the pullback, investors already had growing concerns about a potential “Tech-Bubble” reminiscent of the Dot-Com bubble of 2000, which would eventually result in a crash that disrupted the entire stock market.  These concerns were somewhat muted when the decline in the sector that has carried the stock market to all-time highs in the last year did not influence a wider market selloff.
The tech sector has become increasingly popular, mostly due to the performance of FAAMG, the acronym given to the Tech Giants that have dominated the US stock market: Facebook (FB), Apple (AAPL), Google-owner Alphabet, Amazon (AMZN), Microsoft(MSFT) Corp, and Google owner Alphabet (GOOGL). The Los Angeles Times has reported that the technology component of the S&P 500 alone was up 18% this year.2 The chart below shows how these 5 powerful companies have become the key drivers in major indices:
Source: Business Insider
But popularity can also indicate an over-crowded trade, and the fall on Monday is what can happen once these shares lose their momentum. The past few years have seen a steep rise in the technology sector and any amount of disruption can be brutal for shareholders.
However, even despite the run-up, the most powerful companies in the sector have recorded lower volatility than any other sector in the last 6 months, according to the Research Team at Fidelity Investments. These are companies that people interact with daily; the fact that the tech sector’s biggest names are well-established and highly-profitable should dispel any fears of a dot-com-like bubble. Some might even view a pull-back as “healthy”, potentially allowing for more growth in the future.
It’s hard to imagine the FAAMG companies falling out of favor anytime soon, even with the new Trump Administration’s proposed trading policies that could impact tech companies specifically by imposing a border tax that could hurt profits. But for now, investors shouldn’t sweat a 1 or 2 day move into the red for technology companies. Technology shares bounced back in Wednesday’s pre-market trade, and the short-term negative move can be seen as a small correction to a sector that has had a spectacular run.
An investor cannot invest directly in an index. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.