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Here We Go Again: The Resurgence of the Tech Trade

Updated: Aug 1, 2023

In the annals of financial history, few trends have been as consistently influential as the technology-oriented investment wave. It first took center stage in the late 1990s, then again in 2018, and was most recently propelled back to prominence by the global impacts of the COVID-19 pandemic. Now, as we navigate through 2023, this compelling narrative is re-emerging.

Our narrative takes the State Street SPDRs S&P 500 Index ETF (ticker: SPY), an essential yardstick for large-cap U.S. equities, as its guiding light. SPY is often used as a reference point given its comprehensive representation of the market. As of May 31, 2023, the SPY has registered an impressive 9.68% gain year-to-date, signaling what may be another chapter in the tech resurgence story.

In the driver's seat of this tech resurgence are seven powerhouses: Apple, Microsoft, Amazon, NVIDIA, Alphabet, Meta, and Tesla. These formidable companies, which are at the heart of the global technology and digital revolution, command 26.41% of the index. The collective impact of these companies is notable in how they influence the index's total return. Apple brings 2.20%, Microsoft 2.06%, Amazon 1.77%, NVIDIA 1.02%, Alphabet 1.20%, Meta 1.00%, and Tesla 0.66%. This culminates in a staggering contribution of 9.91% to the index's total return, which amounts to over 102% of SPY's YTD return of 9.68%.

SPY: Top 20 Contribution to Return
Source: Bloomberg

This snapshot of market performance paints a picture of stark contrast. The top 10 stocks are resoundingly triumphant, surging an average of 65.47% YTD, while the remainder of the stocks have dipped an average of -1.42%. When we expand our lens to the top 20 and top 50 stocks, with gains of 52.01% and 32.07% respectively, the remaining stocks continue to tell a tale of struggles with an average loss of -2.23% and -3.60%.

SPY: Top 20 Total Return
Source: Bloomberg

Given the predominance of tech stocks, the S&P 500 index currently sits at a trailing 12-month price-to-earnings multiple of 20.49%. Historically, the P/E ratio for the S&P 500 index has typically ranged between 15 and 20 during the modern post-war era, reflecting market valuation responses to economic conditions, interest rates, and crises. The current ratio signals that the market is placing a premium valuation on these companies, reflective of the high growth potential and resilience that the technology sector offers.

Within this tech-driven surge, the information technology sector has shone brightly, contributing a stellar 8.13% to the index's return. Communication services follow closely behind, adding another 2.38% to the return. Together, these sectors have contributed a substantial 10.51% of SPY's 9.68% YTD return, reflecting the significant role they play in driving market performance. However, while the tech sector basks in this bullish run, other sectors face a more turbulent journey, underscoring the market's inherent dynamism and the importance of a diversified portfolio.

It's tempting to view this tech dominance as an invitation to heavily tilt portfolios towards these high-flying stocks. However, the fundamental principles of investing: diversification and risk management, must always be kept in the foreground. While tech stocks have demonstrated remarkable growth and resilience, they also carry unique risks, from regulatory pressures to the fast-paced nature of technological advancement.

Moreover, these market trends offer a chance to evaluate the state of other sectors. After all, a market in which a handful of stocks deliver most of the returns is not necessarily a healthy one. It's essential to analyze the performances of other sectors and companies, as potential value may lie within.

As we transition from these market observations to practical investment strategies, it's worth considering how our Portfolios On Demand workstation can be a powerful ally. As the tech trade continues to surge, the workstation can help harness its potential while keeping a sharp eye on risk and diversification.

By offering a broad view of market trends and giving control over portfolio customization, the workstation empowers to make calculated investment decisions. You can leverage the benefits of the tech trade and manage associated risks, while also exploring untapped value in other sectors.

This integrated approach allows for the careful balancing of investments across sectors. Even in a market dominated by tech, it's crucial to maintain a diversified portfolio that can withstand various market scenarios.

So, while we navigate through this phase of tech resurgence, remember that tools like our portfolios on demand workstation can provide the insights and control needed to make informed investment decisions, supporting the pursuit of growth, diversification, and risk management. In this dynamic market landscape, it's not just about saying "Here we go again," but rather asking, "Where can we go from here?"

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