- Morgan Stanley CIO and US equities chief Mike Wilson says the record-high concentration of returns among giant tech stocks will change later this year.
- Slow economic growth is one reason mega-cap tech has outperformed, and Wilson says other parts of the market offer bigger returns today - especially if that growth improves.
- Apple, Microsoft, and Alphabet are all valued at more than $1 trillion, and Amazon also briefly surpassed that mark last year and remains close to it.
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Now that the stock market's Club Trillion has three members, it might be getting a little crowded.
Google's parent company Alphabet is now valued at more than $1 trillion, joining Apple and Microsoft as the only US companies above that milestone. Amazon traded at that mark briefly last year and is now valued at about $938 billion.
Combined, the four companies and Facebook - the next-largest company at $632 billion - are valued by investors at well over $5 trillion. Mike Wilson, chief US equity strategist and chief investment officer for Morgan Stanley, says that's a staggering 18% of the total value of the S&P 500 index, and that this share can't last for very long.
"This is the most extreme this metric has ever been, including the tech bubble of the late 1990s," he wrote in a note to clients.
"We fully expect to see powerful rotation to other sectors and stocks at some point this year."
While the tech bubble comparison might be worrying, Wilson isn't calling the stocks a bubble today, and says their dominance makes sense in a climate where economic growth is slow, central banks are easing, and yields are weak.
But he thinks it won't last much longer, and not just because of the eye-popping dollar values of the mega-cap tech companies. It's because over the last few months, their stocks have rallied even though profit forecasts have stayed flat. That makes the gains "speculative," in his view, and makes a sell-off possible if those earnings don't materialize.
"This doesn't have to correct itself immediately but it is an unsustainable development in our view especially if net income concentration doesn't keep pace," he said.
Wilson backs up that argument with this chart. The yellow line tracks the performance of tech stocks compared to the broader S&P 500, while the blue line compares the relative earnings of the sector and the index.
Bloomberg and Morgan Stanley Research
Mike Wilson of Morgan Stanley says tech stocks are blowing away the broader market, but their earnings aren't backing up that performance.
Wilson says tech stocks could "melt up" for a while longer, but there are two basic ways the situation can resolve itself. In one, investors start to flee the sector in response to those weak profit trends, which would be a bearish signal that deprives the market of leadership.
In the other, investors decide to diversify and market leadership gets broader, which Wilson views as bullish.
"The bigger opportunities are away from big cap tech but it will require a greater belief in a bigger growth rebound," he said. He writes that these three trades should work if that evidence materializes.
1. Buy financials over real estate
Wilson says there are broad, positive earnings revisions from banks, which is a sign that their performance is improving and should give a lift to their stocks. And banks have meaningfully outperformed real estate investment trusts since recession fears started to fade last year.
Investors who find that view compelling can enact it through an exchange-traded fund like the Shares US Financials ETF.
2. Buy industrials over semiconductors
Semiconductor stocks have outperformed most of tech and the broader market in recent months, and Wilson says they've outperformed industrials for a long time as investors reacted to weakening global economic data. But he says chipmakers' edge is shrinking, a sign industrials could pull ahead in the near future.
One way to gain exposure to industrial stocks is through the Industrial Select Sector SPDR Fund.
3. Buy energy over utilities
This, too, is a bet on stocks that are more tightly linked to the performance of the global economy. Wilson says the relative performance of these sectors has been flat, suggesting that more cyclical energy stocks could beat the defensive utility sectors if investors are convinced growth is improving.
"We think it is still too early to make a big bet on cyclicals but a good entry point may be approaching after this final test is finished and there is more evidence of a real rebound in manufacturing and inflation expectations," he said.
Traders can put that strategy into play with the Vanguard Energy Index fund.