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Big tech loses sway as S&P 500 becomes more Exxon, less Amazon

The power the world’s technology giants wielded over the US stock market for years as it surged to record highs has been greatly diminished by the bust of 2022.

Even after their recent rebound, Apple, Microsoft, Amazon, Alphabet and Meta Platforms, which are grouped under the acronym “FAAMG”, have lost more than $3 trillion in market value this year as slowing revenue growth and rising interest rates battered valuations. That has cut their weighting in the S&P 500 index to about 19% from a record of more than 24% in September 2020 (see the chart)! 


The shift shows how much the contours of the stock market have shifted since the Federal Reserve (Fed) made a sharp break from the easy money policies that set off a speculative frenzy. Tech shares - which tend to suffer as rates rise since they mean a bigger discount for the current value of future profits - have been hammered this year as the Federal Reserve embarked on an aggressive tightening cycle to curb inflation. As the tech sector’s sway diminishes, more traditional sectors such as energy (5.4%) and banking (4%) are accounting for a greater share of the S&P 500, with companies like Exxon Mobil and Wells Fargo benefiting from high oil prices or rising interest rates. The reversal of fortunes means that investors who piled into the S&P 500 back when tech stocks were surging are now far less exposed to the sector - and its potential rebound – than they were before. By the end of 2021, there was about $7 trillion invested in funds that are tied to the index.

The technology sector got some relief from data that showed US inflation slowed more than expected in October, fueling optimism that the Fed could soon pause its most aggressive cycle of interest-rate hikes in decades. That sent the Nasdaq 100 index up 10% in the days following the release of US inflation. Even so, the Nasdaq is still down 27.4% in USD (-20% in euro) this year, while the S&P 500 has lost 16% (-8% in euro). But we are not convinced tech and, more generally, growth stocks rebound will last due to continuing cost pressures. While investors are optimistic that interest rate increases will end next year, some big tech companies are bracing for the impact of an economic slowdown. Apple, Microsoft, Alphabet, Amazon and Meta Platforms have been responsible for about half of the S&P 500 index’s drop this year, according to data compiled by Bloomberg. If all the companies in the benchmark are weighted equally - instead of by market value, which is how the index is constructed - its drop would have been cut by 6% this year (see the chart).

Although an US “inflation shock” - the main market narrative of 2022 - is now probably over, a sharp rise in services and wage costs will continue to weigh on the growth shares and the performance of world’s technology giants. Amazon has warned of a weak holiday shopping season ahead. Facebook’s parent, Meta Platforms, said it would cut more than 11,000 jobs, the first major round of layoffs in the company’s history as it seeks to reduce costs amid a slowdown in digital advertising. Microsoft has also cut jobs, while Amazon, Alphabet and Apple have all slowed or paused hiring. Big technology stocks have benefited from the almost endless liquidity and cheap money financed by the immense pace of growth. Now a different wind is blowing on the financial markets and investors don’t want to suddenly be without a chair when the music stops playing. In this context, we continue to favor value stocks (versus growth stocks).