Big tech nervousness prompts calls to diversify

As a technology-driven rally brings U.S. stock indexes within striking distance of fresh records, concerns that big names are over-extended and that new regulation might be coming have some investors diversifying beyond the rally leaders.

The S&P 500's five biggest companies, Apple Inc AAPL.O, Microsoft Corp MSFT.O, Amazon.com Inc AMZN.O, Alphabet Inc GOOGL.O and Facebook Inc FB.O now account for 28% of the index's weighting and have been responsible for 25% of its earnings, Goldman Sachs said earlier this month.

On average, these tech and internet-driven stocks have gained 49.23% this year, compared to a 7% gain for the S&P 500 - and are up 9.6% on average since Sept. 21, versus 6.6% for the S&P 500. They are expected to report strong third-quarter earnings in coming weeks, proving their mettle in a year when the coronavirus pandemic fueled a work-fromhome economy while devastating companies linked to sectors like travel, restaurants, and fossil fuels.

Still, some worry that mega-cap tech companies are exposed to factors that may cut their allure in the months ahead. Being long technology is the most crowded trade of all time, according to a recent Bank of America fund manager survey.

"It's all about trying not to have all your eggs in one basket," said Laura Kane, head of Americas thematic investing at UBS Global Wealth Management. "It's about trimming certain exposures and rotating into something else." UBS analysts have recommended diversifying out of mega-cap tech stocks on signs of an economic recovery and climbing valuations. They urge rebalancing into U.S. semiconductors, which are more sensitive to economic recovery, as well as emerging market value stocks and United Kingdom-based equities.

Societe Generale analysts also recently cited a challenging regulatory environment as one reason to diversify out of U.S. tech shares and into Asian ones and European stocks.

Regulatory concerns have heightened following a scathing report here detailing market power abuses by Google, Apple, Amazon and Facebook issued earlier this month by the U.S. House Judiciary Committee's antitrust panel. The report has raised concerns that tough new rules and stricter enforcement for big tech companies will follow should Democratic presidential candidate Joe Biden win the White House. A potential breakthrough in the search for a COVID-19 vaccine also could also spur bets on shares of economically sensitive value and cyclical stocks that may benefit from a stronger economic recovery, potentially dimming the appeal of tech, Soc Gen analysts said.

The median 12-month forward price-to-earnings ratio for the Big 5 tech stocks is 31, while the S&P 500 trades at a 12-month forward PE ratio of 22, according to Refinitiv. Still, they are not as extended as in the dotcom period.

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