Tech Stocks Accounted For 75% Of The Market's October Return

For some context on the unprecedented dominance of the tech sector on the overall market, here is some perspective from BofA's Savita Subramanian on October returns, when Tech continued to lead the other ten sectors, generating +7.8% on a total return basis. This translates into a whopping 75% of the S&P 500's return last month!

Furthermore, with virtually every lagging hedge fund rushing to buy the tech sector, chasing such activist central banks as the SNB, the sector's 24.5% weight in the S&P 500 is now the highest since October 2000.

That said, considering tech companies reported some of the strongest 3Q earnings results, the best revision trends, and rank at the top of BofA's quant model, is there anything to be concerned about?

According to BofA, the biggest risk is the extreme crowding and positioning by fund managers. As Subramanian expains: "we hear frequently from clients, 'you don't want to sell Tech until year end.' And funds certainly reflect this sentiment: Tech is the most overweighted sector by large cap active managers, displacing Discretionary whose relative weight dropped for the sixth consecutive month." As noted above, the recent Tech rally means the sector now represents 24% of the S&P 500 index - a post-tech bubble high - and a remarkable 30% of all active fund holdings today, the highest levels in BofA data history since 2008 (Chart 1).

What about other sectors: in addition to Tech, Utilities (+3.9%), Materials (+3.9%), and Financials (+2.9%) outperformed last month. Laggards were generally defensive: Telecom (-7.6%), Staples (-1.4%) and Health Care (-0.8%) underperformed the most, while Energy (-0.7%) was also in the red despite the rally in oil prices.

YTD, Tech maintains its dramatic lead (+37.2%), contributing just under half of the S&P 500's 16.9% total return, followed by Materials (+20.3%) and Health Care (+19.4%). Telecom (-11.9%) and Energy (-7.2%) remain in the red.

To be sure, the impact of tech on underlying financial metrics is also staggering, as the following charts from Credit Suisse show: with tech, EBITDA margins are near all time high. Ex tech, they are roughly 3% lower and in secular decline, courtesy of high barriers to entry.

The next chart shows that while tech holds the highest share of S&P market cap, it is also the fastest growing sector.

And while the massive crowding in the tech sector is a red flag for Bank of America, for Credit Suisse this is perfectly normal, and in a report released today, its analyst Andrew Garthwaite writes that "many clients cite data indicating that just a handful of stocks (largely tech) account for almost half of returns. However, we don't find such analysis to be particularly informative; such dynamics are far from unusual – in fact, it is often the case that a small number of stocks account for an outsized share of market gains, as shown in the chart below."

Of course, it is also that same small number of stocks that gets hammered once the tide reverses. For now, however, with vol at all time lows, traders have yet to express any concerns that the tremendous tech rally of 2017 is in dangers of ending. Ironically, the single biggest threat to the US tech sector may be the US government itself, which is starting to realize that it is leaving just a little too many pounds of flesh on the table...

Comments

pitz Mon, 11/06/2017 - 12:36 Permalink

An industry-wide crackdown on H-1B abuse would be a great start.  None of the named companies have any excuse for having even a single H-1B or OPT on site given their enormous brand recognition.  And stopping the "offshore" tax abuse which is pretty much common to all of the organizations named on that chart. 

Soul Glow Mon, 11/06/2017 - 12:52 Permalink

Although amazon was implemented perfectly for the slovenly public that doesn't want to get off their asses, it's P/E is way too high and any setbacks with central bank planning will cause a huge panic.  This isn't going to happen soon, but in the next two years we will see a very large financial panic relating to an overheated economy.

Endgame Napoleon Soul Glow Mon, 11/06/2017 - 13:13 Permalink

Crowd a million new, legal immigrants and their extended families in here each year, in addition to millions of illegal immigrants who get their bills paid by taxpayers through welfare and child tax credits for sex and reproduction, and, whichever route you choose when doing the simplest errand, you wait in endless, clogged snarls of traffic, particularly if you live in an area with a school zone every block and more traffic-generating extracurricular activities than school days.

Working moms enjoy excused absenteeism for all of this, including early afternoon departures at the busiest time of the day, with phones lighted up with paying customers. They can get a jumpstart on the after-work traffic and not be so stressed, knowing that equally absentee, back-watching momma managers have their backs, whether it is afternoons off, morning lateness or days and weeks off (for kids, of course).

For the rest of us, all of the increased traffic adds one to three hours onto every workday and an hour for every shopping errand, making what used to be relatively pleasant a tiresome chore. Could be one reason for Amazon’s success, although most people who are not paid per child by government, with free rent/food and child tax credits up to $6,269
have less and less money to spend with Amazon or any other retailer. Rent absorbs half (or more) of our earned-only income. All that traffic is definitely not worth it for what little we can afford to buy.

In reply to by Soul Glow

Racer Mon, 11/06/2017 - 14:22 Permalink

"we hear frequently from clients, 'you don't want to sell Tech until year end.' Good luck trying to squeeze out the door with everyone else!