Has the Big Tech rally run out of steam?

Worries include shares already pricing in future investment gains, rising inflation and new taxes by the Biden administration

Apple's share price has risen fourfold over the past five years. If that repeats itself over the next five years, that would make it a $10 trillion company. Getty Images

There have been few better places for investors to park their money than the US stock market over the past decade, but what about the next 10 years?

Investing is usually a cyclical business and it is unusual for a country or sector to lead the pack, year after year.

That said, if any country can pull it off, the US can. So should you still be investing new money in US shares and funds?

The S&P 500 index of top US stocks has been on a storming run since the 2008-09 global financial crisis, posting the longest bull run in North American stock market history, which is now into its 13th year.

Over the past decade, it has delivered an average annual return of 15.51 per cent a year, according to the USA MSCI index.

That compares with 11.66 per cent on the MSCI World index, which may not seem like a massive outperformance but really adds up over time.

If you had invested $100,000 in the US 10 years ago, you would have a thumping $422,859 today, before charges. MSCI World would have given you $301,284. That is still a solid return, but the US would have given you $121,575 more.

Analysts have been predicting an end to the US bull market for several years now, but 2019 and 2020 generated among the best returns of the decade at 31.64 per cent and 21.37 per cent respectively.

There is no sign of it stopping in 2021, at least so far. In the year to July 31, the US has rewarded investors by delivering another 17.59 per cent.

So much for past performance. As regulators constantly remind us, it is no guide to the future. What matters is what happens next.

US stock market growth has been spearheaded by its all-conquering technology sector, led by tech titans Apple, Amazon, Microsoft, Google-owner Alphabet and Facebook, as well as Tesla and Netflix.

The Nasdaq 100 index has done even better than the S&P 500, growing almost seven-fold over the past decade.

Apple now has a market cap of $2.41 trillion, followed by Microsoft at $2.15tn. Alphabet ($1.84tn), Amazon ($1.68tn) and Facebook ($1tn) complete the trillion-dollar club.

It is difficult to overestimate the importance of technology stocks, Robert White, senior investment analyst at Momentum Global Investment Management, says.

“The sector now represents 27 per cent of the entire US market, up from 19 per cent 10 years ago, and its success has forced other industries to adapt to survive,” Mr White says.

Their success is no bubble, though. “Apple, Amazon, Microsoft, Google and Facebook are hugely profitable companies, generating enviable cash flows with seemingly insurmountable competitive moats,” Mr White says.

Better still, they achieved their success with efficient, asset-light balance sheets, which are highly prized by investors.

One worry is that future investment gains are already priced into their shares and actual performance may disappoint, Mr White says.

“It is much harder for the likes of Apple to maintain growth rates when it is already expected to generate revenues of $365 billion this year,” he adds.

The iPhone maker’s share price has risen fourfold over the past five years. If that repeated itself over the next five years, that would make it a $10tn company. Despite Apple’s merits, that looks unlikely.

Rising inflation may erode the appeal of big tech because it will eat into the value of their projected earnings, while boosting returns on rival asset classes such as bonds, drawing investors away.

Other areas of the US stock market now offer better value, including smaller technology companies with greater growth potential, Mr White says.

Devesh Mamtani, chief market strategist at Century Financial, remains optimistic, arguing that technology, online shopping, streaming, social media and gaming companies all benefited from the Covid-19 movement restrictions and social distancing, and that should continue.

“The pandemic showed the world that it needs big tech, and newly acquired digital customers are unlikely to abandon technology when the pandemic is over,” Mr Mamtani says.

The long-term outlook for tech stocks remains strong as the more virulent Delta strain sparks the possibility of further lockdowns, he adds.

Inflation worries may also have been overdone as the Fed has now adopted a more hawkish approach to monetary stimulus and interest rates, Mr Mamtani says.

This is likely to curb inflation, growth and bond yields. “The last time the US bond yields flattened in 2014, technology and innovative growth stocks outperformed and this could happen again,” he says.

Another concern is that US President Joe Biden may hit big tech with new tax and regulatory measures, knocking their profitability, Mr Mamtani warns.

Although you cannot ignore the sector, many investors may be overexposed simply due to its phenomenal performance, Laith Khalaf, head of investment analysis at stocks and shares platform AJ Bell, says.

“If your portfolio is now dominated by the same few US names, consider taking some of your profits and diversifying elsewhere,” he adds.

It is worth sifting through the top 10 holdings in your investment funds to see if you are unwittingly duplicating the same few companies by default.

For example, many funds labelled as “global” or “international” might actually have a heavy weighting towards the US.

“This is perhaps inevitable, given that the US now makes up an incredible two thirds of the global stock market by valuation,” Mr Khalaf says.

You don’t want to get caught out if it sells off, although the downside will be hard to avoid. “Given the size of the US stock market, an awful lot is riding on its ongoing success.”

Mr Khalaf does not anticipate disaster though. “The tech giants have huge resources at their disposal to develop new products and services and buy out smaller competitors who might be thinking of trying to knock them off their perch.”

Some are worried by valuations, with Amazon trading at a toppy-looking price-earning (P/E) ratio of 57.87 earnings. But again, Mr Khalaf is unfazed.

“Alphabet, Facebook, Microsoft and Apple all trade on forward P/Es of high 20s or early 30s. That’s at the pricey end of proceedings, but it is also a long way from Tesla, which trades at an incredible 128 times earnings,” he adds.

If you are in two minds about the US stock market, you are not alone. The market has hit multiple record highs in 2021 but investor sentiment has been surprisingly negative, Olivier d’Assier, head of Apac applied research at Qontigo in Singapore, says.

Many suspect all the good news has been priced into current stock valuations, while inflation, Covid-19 variants and growing geo-political tensions all lower the mood, Mr d’Assier says.

It isn’t all bad news, though. “Governments and central banks remain in an ultra-accommodative mood and that limits the downside, especially for equities, since there isn’t much competition for returns from the other asset classes,” Mr d’Assier says.

We may remain in this complicated state for a while, with investors feeling like almost anything could happen, he adds.

The best way for most private investors to respond is to stay invested and spread their money across a diversified range of global asset classes. Given their sheer scale, US technology stocks will be part of that spread.

Betting against them has been a losing strategy for years, but resist the temptation to go all in.