Tera, the prefix for trillion, stems from the ancient Greek word for monster. And with a combined market cap of $6.7 trillion, these “monster”-caps have amassed remarkable influence to go with their size.
As Berenberg senior strategist Jonathan Stubbs points out, the tera-caps are now larger than the entire U.S. bank and energy sectors combined. They are bigger than the Japanese equity market ($5.7 trillion) and the combined Hong Kong/China market ($4.4 trillion).
With a market cap of $2.16 trillion, Apple (ticker: AAPL) is now larger than the FTSE 100 index, a basket of the largest companies in the United Kingdom. Amazon (AMZN), at $1.7 trillion, has grown bigger than the CAC 40, France’s large-cap market. Microsoft’s market cap of $1.7 trillion exceeds the DAX 30, Germany’s large-cap index. Alphabet at $1.1 trillion edges the value of the Swiss large-cap market, or SMI Index.
The tera-caps are also carrying the U.S. market on their shoulders. The S&P 500 has a market cap of $29 trillion, making the tera-caps worth about 23% of the total. Throw in Facebook (FB), at $865 billion, and the weighting of the five largest stocks amounts to 26% of the market.
The tera-caps have contributed mightily to the market’s return, accounting for 115% of the S&P 500’s rise in market cap this year, Stubbs says. They have contributed 91% of the market’s total return. Add in Facebook, and the top five stocks have contributed 100% of the market’s return, overcoming losses and minimal gains from hundreds of other stocks in the index.
All of which raises questions: Are we staring at another tech bubble? And if investors lose confidence in the tera-caps, can the broader market stand on its own?
“There are clearly significant risks and an echo of 1999,” says Stubbs in an interview with Barron’s. Four years ago, the tera-caps were 10% of the S&P 500. They were just 5% in March 2009, at the bear-market lows of the financial crisis.
But Stubbs argues that the tera-caps’ leadership and valuations are warranted, partly because we’re living in an unprecedented era. The markets are being propped up by trillions of dollars in excess liquidity from global central banks. Interest rates are negative in Europe and near record lows in the U.S., with the 10-year Treasury yielding just 0.7%. Equity valuations look extreme in absolute terms, but they are far more reasonable against this backdrop.
“We live in a highly distorted world, and that distortion has grown since the financial crisis with ever-expanding support mechanisms from policy makers,” he says. “We have distortions in rates, gold, cryptocurrencies, and equity markets. And a removal of support mechanisms brings risks.”
The tera-caps are also supported by fundamentals: They are generating higher surpluses of free cash flow, have stronger balance sheets, and exhibit better earnings momentum and growth forecasts than many global indexes, Stubbs says.
The risk comes down to a few broad areas: regulatory (such as a breakup of Big Tech), geopolitical concerns (including an escalation of trade tensions with China); higher taxation; and a double-dip recession.
But several of those risks aren’t specific to Big Tech—they would siphon demand for equities in general and lead to valuation haircuts broadly. And tech has proven resilient, often outperforming in market declines (along with health care). Stubbs calls tech a “whatever weather winner.”
Nonetheless, there is a growing disconnect between the share prices of the tera-caps and Wall Street estimates. Apple, for instance, trades around $504, above the average price target of $434. Amazon at $3,438 trades just below the average target of $3,665. Microsoft is about even with its average target of $231, while Alphabet is roughly $100 below the average of $1,746.
Bank of America downgraded Apple stock to a Neutral rating in early August, granting the stock a $470 target. Shares now trade at the highest premium to the S&P 500 in a decade, writes analyst Wamsi Mohan, and it is getting tougher to support more upside based on a sum-of-the-parts analysis.
Bespoke Investment Group also views Apple stock as overbought, with shares trading nearly 60% above their 200-day moving average—the highest level in over a decade.
One piece of advice remains timeless: If you’re worried about the tera-caps, increase your portfolio’s diversification, holding more bonds, cash, alternatives, and gold, along with equities in other segments of the market.
The monsters of tech may not carry the market on their shoulders forever, but that way, if they do falter, they won’t topple your portfolio with them.