Tech’s Influence Over Markets Eclipses Dot-Com Bubble Peak

Technology companies are set to end the year with their greatest share of the stock market ever, topping a dot-com era peak from the latest illustration of their growing influence on global consumers.

Companies in which do everything coming from manufacturing phones to operating social-media platforms at This particular point account for nearly 40% of the S&P 500, on pace to eclipse a record of 37% coming from 1999, according to a Dow Jones Market Data analysis of annual market-value data going back 30 years.

Apple Inc.,


AAPL -1.40%

which earlier This particular year became the first U.S. company to hit a $2 trillion market capitalization, accounts for more than 7% of the index on its own. Early last month, in which accounted for 8% of the S&P, the largest share ever for any stock in data going back to 1998.

S&P 500 share of total market value, by sector

Industrials

in addition to materials

Industrials

in addition to materials

Industrials

in addition to materials

Industrials

in addition to materials

Despite a recent pullback in favorite tech stocks like Apple in addition to

Netflix Inc.,


NFLX -2.06%

many of these companies still number among the market’s leaders for 2020, powering the S&P 500 to a nearly 8% gain for the year in addition to keeping in which near all-time highs during the coronavirus-induced economic slowdown. Tech stocks lifted markets early This particular past week before dragging them down later, highlighting their sway over the major stock indexes.

Trends like remote work in addition to cloud computing are driving growth at these firms, helping tech companies expand their businesses when many are struggling. Yet the concentration of gains in a narrow group of companies concerns many investors, who worry in which stocks are too dependent on the sector in addition to in which a significant pullback in a few names could bring down markets.

Previous peaks in a sector’s influence over the S&P 500 have preceded selloffs. The tech sector tumbled after the dot-com bubble burst. Banks’ influence over markets peaked in 2006 ahead of the financial crisis, in addition to energy stocks slid after hitting a fresh high in their share of the index in 2008.

Few analysts say tech stocks are as overvalued as they were two decades ago, with sturdy earnings growth in addition to near-zero interest rates justifying much of the group’s recent ascent. yet many investors are bracing for more volatility in a sector in which has risen remarkably quickly in addition to pulled the rest of the market along with in which.

“We’ve had a mandated digital lifestyle,” said Alison Porter, a portfolio manager focused on the sector at Janus Henderson Investors. She remains confident from the biggest technology companies because of their reliable growth in addition to prominence with people staying home during the pandemic.

Investors This particular week will monitor the next round of third-quarter earnings coming from companies including Netflix, as well as the latest figures on weekly jobless claims to gauge the health of the economy.

Because Congress hasn’t passed additional stimulus measures, many traders remain hesitant to favor parts of the market in which are more directly tied to economic growth. in which also held true throughout the slow yet sturdy expansion in which ended earlier This particular year. While data show the tech giants employ fewer workers than some some other previous market leaders, they do invest heavily in their businesses in addition to allow some other firms in addition to consumers to buy in addition to sell goods in addition to services more efficiently.

Howard Marks, co-founder of investment firm Oaktree Capital Group LLC, said in a recent memo to clients in which measures of how expensive tech stocks are relative to current profits could actually understate the potential of these companies because they spend so much to drive their rapid growth.

Analysts estimate the tech sector’s share of S&P 500 corporate profits could reach about 36% This particular year, FactSet data show. The information-technology sector incorporates a cost/earnings ratio of 28 based on the group’s profits coming from the past year, compared that has a ratio of 24 for the S&P 500. Communication-services firms trade at 25 times earnings, while Apple,

Microsoft Corp.

,

Facebook Inc.

in addition to

Alphabet Inc.

have valuations from the mid-30s. Netflix’s ratio is actually about 0, while

Amazon.com Inc.’s

is actually roughly 130.

Even for more-expensive internet companies, many investors are willing to pay for their rapid growth.

“They have received an added boost over the last 10 years because the broad economic backdrop has been lackluster,” said David Lebovitz, a global market strategist at J.P. Morgan Asset Management. He is actually recommending in which clients favor companies within the sector in which aren’t as expensive as the most favorite internet stocks.

At the same time, frenzied trading from the most favorite internet companies remains a concern for many market watchers. Some of in which activity has taken place in options tied to tech stocks. Options grant the holder the choice to buy or sell a stock at a certain cost by a specified date. Banks in addition to some other firms in which sell options to investors often then hedge against prices going up or down by trading tech investments themselves, a force in which can exacerbate volatility. Japanese conglomerate

SoftBank Group Corp.

was a big buyer of tech-stock options earlier This particular year.

The analysis of tech’s concentration from the S&P 500 is actually based on companies from the information-technology in addition to communication-services sectors. Notably, in which group excludes Amazon, the e-commerce giant in which is actually from the consumer- discretionary sector. Including Amazon, which incorporates a market value around $1.6 trillion, would certainly make the tech sector’s sway over markets even bigger.

Because the S&P 500 is actually weighted by a company’s market value, the biggest internet firms have overshadowed declines in several sectors This particular year. In another illustration of the group’s strength during the pandemic, the S&P is actually outpacing a edition of the index in which gives every stock an equal weighting by nearly 10 percentage points This particular year, a gap in which would certainly be the highest since the late 1990s.

“The longer This particular backdrop continues, the further they’re going to pull away coming from the pack,” said Amanda Agati, chief investment strategist at PNC Financial Services Group, which is actually favoring companies more tied to remote work in addition to learning recently like technology, health-care in addition to consumer-staples firms.

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What does the future hold for tech stocks? Will their dominance on the stock market continue next year? Why or why not? Join the conversation below.

Amazon in addition to some other large internet companies have come under increasing regulatory scrutiny in recent weeks, that has a Democratic-led House of Representatives panel recently finding in which Congress should consider forcing the tech giants to separate their dominant online platforms coming from some other business lines.

Few analysts expect the biggest tech firms to soon be broken up, in addition to regulatory actions are often slow to play out, yet many investors think regulation could be another source of volatility from the weeks ahead.

“The only thing in which definitely makes me nervous as a tech bull is actually the likelihood of government intervention,” said Jacob Walthour, chief executive of Blueprint Capital Advisors. Still, he recommends clients favor technology stocks, e-commerce companies like Amazon in addition to electric-auto maker

Tesla Inc.

because of their growth potential.

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com

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