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As large cap gets larger, can the tech rally continue?

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NEW YORK: Technology shares have led US stocks to record highs and are expected to continue to rise, but as market value becomes concentrated in the largest companies, some are beginning to look for the next rally leader.


The technology sector of the S&P 500 has risen roughly 20 per cent so far in 2017, led by Apple, Alphabet, Facebook and Microsoft.


The only other company with comparable gains in market value this year is Amazon, a market darling not in the tech sector despite being a big player in cloud services and data storage.


“These are the dominant players in their specific spaces and the hottest areas in tech,” said Daniel Morgan, Senior Portfolio Manager at Synovus Trust Company in Atlanta, highlighting their exposure to the cloud and artificial intelligence.


“You will continue to see money flowing into those names. People want to be exposed to the hottest areas,” he said.


Active funds have continued to throw their money behind the leaders with a record overweight on the technology sector, according to BofA/Merrill Lynch data going back to 2008.


But more than a third of the 2017 gains in the S&P 500 have come from these five companies, and the concentration of the advance has some investors jittery.


“Given how significant the (large cap) leadership has been year to date, I kind of think you need to find another group to produce that leadership,” said Jim Tierney, Chief Investment Officer of concentrated US growth at AllianceBernstein in New York.


Echoing Dell, Cisco, Intel and yes, Microsoft itself, the leaders of the Y2K tech boom, these new “five horsemen” have added more than $612 billion in value to the stock market this year.


Their 2017 gains alone could buy the 85 smallest companies of the S&P 500.


Their combined value, near $3 trillion, is not far from the market value of all the other components of the Nasdaq 100. This tech rally has come hand in hand with heightened expectations for profits.


Investors are currently paying $18.50 for every $1 in earnings expected over the next 12 months in the sector, compared to the more than $40 they paid during the dot-com bubble and even the $20-plus seen during the most recent market peak in 2007. Tech sector earnings are expected to grow 11 per cent in the second quarter after rising near 21 per cent in the first, according to Thomson Reuters data.


However, with gains of more than 33 per cent for Apple, Facebook and Amazon, near 25 per cent for Alphabet and 15 per cent in Microsoft, compared to a gain of 8.5 per cent for the S&P 500, the room for more upside is declining.


Despite expecting gains upward of 20 per cent for the rest of the year on the so-called FANG stocks — Facebook, Amazon, Netflix and Alphabet — and their ilk, analysts at Fundstrat recommended in a Friday note balancing portfolios by scooping up the year’s underperformers: banks, energy and telecoms.


They are not alone in searching for exposure outside technology.


“We’re most overweight in technology but I don’t want to stay too long at the party,” said Alan Gayle, Director of Asset Allocation at RidgeWorth Investments in Atlanta.


“What I’m watching for is an opportunity to lighten up on tech exposure and put it into some of the more cyclical areas,” he said. ‘‘Financials are going to be catching a tailwind.”


AllianceBernstein’s Tierney bets beyond tech on healthcare, the second-largest sector weight on the S&P 500.


“Healthcare has really lagged the last 18 months or so. They could certainly pick up the mantle.”


US STOCKS:  US stocks closed at record levels for a second consecutive session on Friday, as gains in technology and industrial stocks more than offset a lukewarm jobs report.


Nonfarm payrolls increased by 138,000 in May, well short of the 185,000 expected by economists.


The prior two months were revised lower by 66,000 jobs than previously reported.


Average hourly earnings rose 0.2 per cent in May, following a similar gain in April, but the unemployment rate fell to a 16-year low of 4.3 per cent.


Despite the disappointing data, market participants still largely anticipate the Federal Reserve to raise rates at its June 13-14 meeting, with traders expecting a 90.7 per cent chance of a quarter-point hike, according to Thomson Reuters data.


“It’s certainly surprising.


It doesn’t really correlate well with virtually all the other data on the labor market that we’re seeing,” said Russell Price, senior economist at Ameriprise Financial Services Inc in Troy, Michigan.


The modest increase, however, could raise concerns about the economy’s health after gross domestic product growth slowed in the first quarter and a string of softening data this week, including reports on housing and auto sales.


The economy needs to create 75,000 to 100,000 jobs per month to keep up with growth in the working-age population. Job gains are slowing as the labour market nears full employment.


The Dow Jones Industrial Average rose 62.11 points, or 0.29 per cent, to 21,206.29, the S&P 500 gained 9.01 points, or 0.37 per cent, to 2,439.07 and the Nasdaq Composite added 58.97 points, or 0.94 per cent, to 6,305.80. — Reuters


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