Big Tech's Rebound Plays to Growth-Stock Bets
Shares of large U.S. technology companies are powering the broader market higher again, vindicating many individual investors who bet big on growth stocks.
Together, Advanced Micro Devices Inc., Google parent Alphabet Inc., Amazon.com Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp., Netflix Inc., Nvidia Corp. and Tesla Inc. comprise roughly a quarter of the S&P 500’s market cap, according to FactSet. That means they have an outsize influence on the direction of the major stock index.
They represent an even bigger share of the average individual investor’s portfolio at about 50%, according to Vanda Research.
Many of those investors got burned last year when tech stocks tumbled as the Federal Reserve aggressively raised interest rates to tame inflation. But this year’s rebound in the shares, punctuated by some stronger-than-expected earnings reports last week, is comforting those who have stuck with growth-oriented plays.
Meta shares, for instance, jumped 13% last week when the company reported its first sales increase in nearly a year; the stock has doubled this year. Microsoft rose 7.5% last week after reporting faster-than-expected sales growth, extending its year-to-date gains to 28%.
“I’m not a millionaire and I don’t have an enormous portfolio,” said Jeronimo Oliva Velez, a 43-year-old web developer in Buenos Aires. “I have to take some risk in investments to get the money I want.”
Mr. Velez says he only invests in stocks and roughly 35% of his portfolio is in Microsoft. He has big positions in Nvidia and Meta, too.
For many individual investors, the stakes ramp up Thursday when Apple is on deck to report its earnings. The company makes up about 19% of the average individual investor’s portfolio, according to Vanda, and around 7% of the S&P 500’s market cap, according to FactSet.
Plus, all eyes will be on the Fed’s policy meeting Wednesday as investors await the central bank’s interest-rate decision and look for clues about when officials might be done raising rates. The April jobs report, due Friday, will offer additional insights into the health of the economy.
Tech stocks have climbed this year in part because investors are betting the Fed will soon pause its interest-rate-raising campaign or even cut rates later this year. They even rallied last month during the crisis in the banking sector, helping to keep the broader market afloat. The S&P 500 is up 8% in 2023, but without the contribution of eight megacap tech companies, it would be down for the year, according to Bianco Research data through Wednesday.
“Tell me where Big Tech is going and I’ll tell you where the market’s going,” said Sandy Villere, portfolio manager at Villere & Co. Mr. Villere said his firm is currently orienting client portfolios more toward growth stocks but plans to buy more value stocks, as he expects recessionary pressures to hit the market later this year.
Even with this year’s gains, most tech stocks are still well below their records. Meta shares, for example, are 37% below their 2021 high. The average individual investor’s brokerage portfolio had shed about a quarter of its value from a November 2021 peak, according to Vanda’s estimates as of last week.
Higher share prices also run the risk of making stocks appear more expensive relative to companies’ profits. Companies in the S&P 500 are trading at about 18 times their projected earnings over the next 12 months, according to FactSet, higher than the 10-year average of 17.3. Microsoft trades at a multiple of about 28, Tesla’s is around 41 and Nvidia’s is roughly 55.
Axel Perez, a cybersecurity consultant in Elche, Spain, said he plans to add to his positions in some of his favorite stocks like Microsoft and Apple in the event of any share-price weakness ahead. Microsoft makes up about 12% of his portfolio, and Apple is roughly 8%, he said.
“They’re the winners in their space. They’re going to continue doing really well in the future,” Mr. Perez, 40, said. “If you ask us individual investors, we have much more potential because we can just build the portfolio as we like without the pressure to have immediate returns.”
Net purchases of megacap tech stocks by individual investors have stalled since a run-up in buying earlier this year, but remain close to 2022 averages. The easing of inflows could reflect individuals selling shares to lock in profits while stock prices are high, as they did in 2021, according to Vanda Research.
Angel Diaz, 61, said he sold a significant portion of his Microsoft shares to take some profits after the stock reached a fresh 52-week high last week off the back of the company’s earnings report. Microsoft still comprises about 10% of his portfolio, while Apple makes up 30% and Amazon is about 5%, he said.
Mr. Diaz, who lives in Lubbock, Texas, and works in medical-device manufacturing, said he plans to sell some Apple shares if the company’s earnings report leads to a rally in the stock. He is also looking for more buying opportunities if his favored tech stocks slip.
Although Mr. Diaz said he recognizes the risks of concentrating his investments in tech stocks, he believes the potential reward outweighs the downside.
“I’ve lost some money in the stock market, but I’ve made a lot more than I’ve lost,” he said.
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