A recent report by Business Standard noted that seven of the largest US technology companies — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — have added $4.5 trillion to their market capitalisation since the start of this year. The Nasdaq-100 is up 44 percent, the NYSE FANG+ index has gained 81 percent, while the broader S&P 500 index is up only about 20 percent year-to-date (YTD), it said.
One must note that the rally in US stocks has been driven primarily by the seven names, it said.
“If you exclude them, the US market hasn’t moved much, which is why there is a large divergence between the performance of the NASDAQ-100 on the one hand, and the Dow Jones and the S&P 500 on the other,” it quoted Alekh Yadav, head of investment products, Sanctum Wealth, as saying.
Rajeev Thakkar, chief investment officer, PPFAS Mutual Fund, believes that some US technology stocks could well be in bubble territory, it said. “After the sharp run-up, risks would be especially high in stocks where the expected revenue and cash flows don’t materialise,” he said, as per the report.
Yadav, too, is of the view that the risks in these stocks have become skewed towards the downside, it added.
According to Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisers, basing one’s investment strategy on a single technology can be risky as trends change rapidly within this sector, it said. “Owing to the dynamic nature of technology, a seemingly attractive technology today may not hold the same promise in the future. A pertinent example is the Metaverse. Today, the enthusiasm for it has diminished noticeably compared to a couple of years ago,” Dhawan told BS.
With the tech indices trading above their long-term average valuations, new entrants have a significantly smaller margin of safety than those who got in at the start of the year. “Do not succumb to the fear of missing out and make large investments in one go. Instead, invest in a staggered manner to average out your purchase cost,” he advised investors, as per the report.
“If your exposure to US funds is 20 percent of your equity portfolio, then exposure to the technology sector should not exceed 25 percent of this exposure,” noted Dhawan.
He added that investors in FANG+ based funds are at greatest risk as this index has only a few stocks and is not diversified across sectors, it said.