Why investors are actually trimming their contact with tech stocks

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

The S&P 500's five biggest companies, Apple, Microsoft, Amazon.com, Alphabet, and Facebook now take into account 28 % of the index's weighting and also have been accountable for 25 percent of its earnings, Goldman Sachs said earlier this month.

Typically, these tech and internet-driven stocks have gained 49.23 % this year, in comparison to a 7 percent gain for the S&P 500 - and so are up 9.6 percent normally since September 21, versus 6.6 percent for the S&P 500. They are anticipated to report strong third-quarter earnings in the coming weeks, proving their mettle in a year when the coronavirus pandemic fueled a work-from-home economy while devastating companies associated with sectors like travel, restaurants, and fossil fuels.

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

"It's about trying never to have all of your eggs in a single basket," said Laura Kane, head of Americas thematic investing at UBS Global Wealth Management. "It's about trimming certain exposures and rotating into another thing."

UBS analysts have recommended diversifying out of mega-cap tech stocks on signs of an economic recovery and climbing valuations. They urge rebalancing into US semiconductors, which are more sensitive to financial recovery, and also emerging market value stocks and UK-based equities.

Societe Generale analysts also recently cited a challenging regulatory environment as your reason to diversify out folks tech shares and into Asian types and European stocks.

Regulatory concerns have heightened carrying out a scathing report detailing market power abuses by Google, Apple, Amazon, and Facebook issued earlier this month by the US House Judiciary Committee's antitrust panel. The report has raised concerns that tough new rules and stricter enforcement for big tech companies will observe should Democratic presidential prospect Joe Biden win the White House.

A potential breakthrough in the search for a Covid-19 vaccine also may possibly also spur bets on shares of economically sensitive value and cyclical stocks that may reap the benefits of a stronger economic recovery, potentially dimming the selling point of tech, Soc Gen analysts said.

The median 12-month forward price-to-earnings ratio for the Big 5 tech stocks is 31, as the S&P 500 trades at a 12-month forward PE ratio of 22, according to Refinitiv. Still, they aren't as extended as in the dotcom period, with overall profitability, dividends, and balance sheet strength in far better shape than twenty years ago.

Companies investors will be watching in a few days because they report third-quarter results to include Netflix on Tuesday, Tesla, and Verizon Communication on Wednesday, and Intel on Thursday. Apple, Amazon, Alphabet, Microsoft, and Facebook report next week.

Many investors still see the big tech names, with their strong balance sheets and financial results, as havens as coronavirus cases continue to climb and the economy struggles with too little new fiscal stimulus.

"These businesses deliver powerful profits," said Jack Ablin, chief investment officer at Cresset Wealth Advisors. "Folks have to remember that the five major tech companies make more in earnings than the complete Russell 2000 combined, so this isn't the web bubble."

It might be smart to trim some tech exposure if the positioning has gotten too overweighted, but the sector's gains are largely being driven by fundamentals, said Michael Farr, president of Farr, Miller & Washington.

To rotate out of tech as a result of big gains and some recent volatility will be "a suckers' trade", he added. "Reports of their demise have been greatly exaggerated," he said of the big tech stocks.