Analysts are firing warning shots over the current state of the tech market. After leading a strong run-up in the wake of the COVID-19 crisis, many suggest that the sector is due for a correction.
Each of the ‘big five’ stocks—Facebook, Amazon, Apple, Netflix, and Google (FAANG for short), representing 20% of the U.S. stock market, has seen substantial growth this year.
Facebook and Google (Alphabet) are up 38% and 19% respectively, Apple and Netflix, 65% and 59%, and Amazon has led the way with 78% gains. The group now represents 12% of the MSCI World Index.
However, in spite of a remarkable year of gains, the sector is in danger of becoming a bubble, according to analysts. While last week saw a 4% decline for the S&P 500 tech sector, there could still be room to fall.
Jonathan Bell, chief investment officer at Stanhope Capital, told investors that the tech sector is in ‘bubble territory.’ The exuberance in the small number of stocks generally reflects the formation of a bubble.
Leo Grohowski, chief investment officer at BNY Mellon Wealth Management, had a similar warning for the market. He noted that the sell-off last week was a ‘good wake up call’ that, in spite of positive gains, the market is fraught with risks.
The substantial influx of investments in the tech sector points to the need for diversification. The use of hedge investments and other assets can shift risk where a portfolio is heavily weighted in a single direction.
The recovery in the stock market has seen hedge investments like gold and Bitcoin lose ground, but a tech decline could send investors scrambling back. Bell suggests making sure to weight a portfolio to limit potential losses.