On the face US stock markets have done exceptionally well since Donald Trump became president, even if there have been a couple of wobbles. Many analysts have been scratching their heads as to why the markets have been so strong despite concerns about Donald Trump’s experience and his sometimes bizarre activities. A report today seems to cast some light on why markets have been so strong with a third of gains in the S&P 500 index attributed to the technology sector. So, are US stock markets over reliant on tech stocks?
Are tech stocks the future?
Amazon, Apple, Facebook, Microsoft and Alphabet (formerly Google) by themselves account for a third of the rise in the S&P 500 index. Indeed only this week Amazon topped the $1000 per share level for the first time ever indicating investor confidence going forward. There is no doubt that these five companies dominate the technology sector and their market caps alone are into the hundreds of billions. However, is it dangerous for stock market indices to seemingly favour technology stocks so strongly?
During 2017 the information technology sector has increased by 20.01%, consumer discretionary by 11.52%, healthcare by 9.54%, utilities by 9.47% and consumer staples by 8.99%. These are the top five performing sectors of the S&P 500 index and perfectly illustrate the stranglehold that information technology has over this index. We all know that technology is the future and the five companies we listed above have performed extremely well and there is no reason to suggest they won’t continue to do so in the future. However, what if the technology sector took a hit?
Traditional sectors need to take up the slack
The very fact that technology shares have been so strong would indicate that many traditional sectors such as banking need to take up any slack as and when the technology sector succumbs to profit taking. We know that nothing ever goes up in a straight line and at some point, whenever this may be, the technology sector will pull back. Depending upon how other sectors perform during this period it could have a significant impact on the S&P 500 index. This in turn could spook investors overall and lead to a short term downturn in share prices.
One of the main problems is that many of the traditional sectors which lag the technology sector are suffering because of new technology and new systems. Indeed over the last few weeks we have seen the likes of Bill Gates waxing lyrical about robot “employees” and the fact that if they do take traditional jobs then each robot should have to pay a preset rate of tax. In theory this is a good idea but in practice it may be impossible to put into place in the short to medium term.
Watch out for the traps
The technology sector has certainly introduced a feelgood factor into other areas of the stock market and indeed the vast majority of investors believe markets will move higher in the short term. However, it is dangerous to fall into a false sense of security and assume that everything will continue to rise. We only need to look at the recent activities of Donald Trump to see that he is becoming erratic and causing major problems with US overseas relations.
The technology sector is probably one of those which could benefit most from Donald Trump’s policies, if he manages to push them through, with reduced red tape, greater US government investment and a much higher profile for the sector as a whole.