Summer’s here, and a 5%-10% pullback in concentrated big cap tech may be too
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The risk of too great a concentration in big cap tech stocks is again back in focus. “Concentration risks are exceptional, a longer-term concern for uber caps. Today’s Russell rebalance should be a material liquidity event and catalyst for a near-term pullback as acute liquidity demands for active and passive investors are satisfied.” That was Wells Fargo’s Chris Harvey in a note to clients Friday morning. Harvey — and many others — have been warning about increased concentration risks among the mega-cap tech stocks for some time, with little effect. The Russell reconstitution on Friday was a perfect opportunity for those needing to move large blocks of stock, particularly tech stocks. NYSE and Nasdaq volumes were more than 50% higher than normal. There was so much stock available to buy and sell that there was a good chance large blocks could be bought and sold without significantly moving prices. That time may be coming to an end. There’s a renewed focus on tech megacaps due to: 1) seasonally lower volumes in the months ahead, 2) sky-high high prices and valuations for megacap tech, and 3) a renewed concern that interest rates may be inching higher as central banks continue their efforts to rein in inflation. Many have been saying that a 5%-10% pullback is overdue, certainly for big cap tech. The correction may already be starting: many big tech names, particularly semiconductors, were down in the high- to mid-single digits last week. Semis last week Intel down 9.2% AMD down 8.4% STMicro down 7.0% Skyworks down 6.6% Broadcom down 5.3% How big are tech companies? Apple is as big as the GDP of France It’s one thing to say Apple’s market cap is nearly $3 trillion, but how do you convey how big $3 trillion is? Some viewers were openly skeptical a month ago when David Faber and I discussed the market capitalizations of Apple, Microsoft, Nvidia and others, comparing them to the GDP of big countries like the UK and France. But it’s true, and many strategists have now routinely begun taking note of this as a way of conveying the size of these companies. Wells Fargo’s Chris Harvey, in that same Friday note, also has taken this approach. Apple as big as France? (market cap vs. country GDP) Apple $2.9 trillion France $2.9 trillion Source: Wells Fargo Microsoft bigger than Italy? (market cap vs. country GDP) Microsoft $2.5 trillion Italy $2.2. trillion Source: Wells Fargo Alphabet as big as Mexico? (market cap vs. country GDP) Alphabet $1.7 trillion Mexico $1.6 trillion Source: Wells Fargo Tesla bigger than Taiwan? (market cap vs. country GDP) Tesla $839 billion Taiwan $791 billion Source: Wells Fargo This list could be extended further, but Harvey is trying to make a point: “Today, there are eight companies whose market caps would place in the top-25 of national GDPs,” he writes. “By comparison, ten years ago there were none. But if we go back to the end of 1999 — the best comp for today’s Tech-led, arguably over-valued market — there were ten such companies.” Those ten were Microsoft, General Electric, Cisco, Walmart, Intel, Nokia, Pfizer, ExxonMobil, IBM and Citigroup. Of the 10, only one (Microsoft) is still in the top 10. “Using 1999 as our example, we wonder how much longer the current chart (Apple > France and Tesla > Taiwan) is sustainable,” he writes. None of this has any impact on tech bulls, like Dan Ives at Wedbush, who insist that AI is having the same impact on tech that the internet did in the 1990s. “We believe overall the tech sector will be up another 12%-15% in the second half of this year led by software and the chip sector with Big Tech remaining the ‘torch bearer’ for this tech rally continuing to heat up,” Ives wrote in a note to clients Monday morning.
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