In this short video Sean Markowicz explains why the market dominance of big tech firms might prove to be a threat to their own future performance.
While many businesses are struggling under the global lockdown, the largest technology companies are thriving. Firms such as Amazon, Microsoft, Apple, Google and Facebook have all seen increased demand for their digital services, as more people shop online and work from home. As a result, their share prices have vastly outperformed the US equity market.
But is their dominance ringing alarm bells? The tech giants have already faced a great deal of criticism over their anti-competitive behaviour and the pandemic has only intensified the scrutiny. The more powerful these firms become, the higher the likelihood of regulatory action being taken to supress their market control. History is replete with such examples.
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At the same time, the US equity market is increasingly concentrated in just these five tech stocks.
Their combined market-cap (i.e. the total value of all of their outstanding shares) weighting in the S&P 500 index has more than doubled from roughly 8% in 2015 to 20% today.
A market this narrow should give some cause for concern. These narrow rallies tend to end when investors pile into the market leaders until they no longer justify their valuations, or when an economic recovery helps the laggards to catch up.
Either way, these firms may find it increasingly difficult to repeat their stellar market performance going forward.
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