Narrow market leadership and the crowding of investors into technology stocks were major concerns in 2017. Going into 2018, given sky-high tech stock valuations and their big run in 2017, various market strategists were recommending that investors rotate out of the sector. Nonetheless, more than 55% of the gain in the S&P 500 Index (SPX) for the year-to-date through February 20 was driven by just four tech giants, based on analysis by S&P Dow Jones Indices for The Wall Street Journal. These are Amazon.com Inc. (AMZN), Microsoft Corp. (MSFT), Netflix Inc. (NFLX), and Nvidia Corp. (NVDA). 

Their respective contributions were 27%, 13%, 8% and 7%, per the same sources. "When you see a Netflix or Amazon leading, it's not necessarily a great sign of investor confidence, since you know those names can always deliver growth no matter what's going on," is what Jack Ablin, founding partner and chief investment officer of Cresset Wealth Advisors told the Journal.

^SPX Chart

^SPX data by YCharts

Predictions Gone Wrong

Against a background of a strong U.S. and global economy, with GDP growth forecasts being ratcheted upwards in recent months, economically sensitive cyclical stocks were widely expected to lead the market in 2018. These include manufacturers, energy companies, banks, commodities  producers and basic materials suppliers, the Journal notes.

Banks constitute the one group among these that has been a leader. The Financials Select Sector Index (IXM) has advanced by 4.0% for the year-to-date through February 23, per S&P Dow Jones Indices, beating the 2.8% gain for the S&P 500.

However, the Materials Select Sector Index (IXB) is up by just 1.2%. Industrials had soared in the aftermath of the 2016 election based on the massive infrastructure spending program advocated by President Trump. As this program has stalled, so have these stocks. They staged a rally late in 2017, but have cooled off since then. The Industrials Select Sector Index (IXI) has gained 2.5% year-to-date. (For more, see also: 6 Stocks That Will Rise With the Global Economy.)

Big Value Detractors

Energy stocks have been hit particularly hard in 2018. Just two of them, Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX), took away about 12% of the S&P 500's advance through February 20, per S&P Dow Jones Indices and the Journal. Rounding out the five biggest drags on the S&P 500 through that date were Procter & Gamble Co. (PG), Johnson & Johnson (JNJ) and General Electric Co. (GE). These three collectively knocked about 16% off the index, the Journal adds.

The Fabulous Foursome

These are the performance figures for the four big tech stocks mentioned above, for the year-to-date through February 23, per Yahoo Finance:

  • Amazon: +28.3% YTD, 97.47 forward P/E
  • MIcrosoft: +10.0% YTD, 23.93 forward P/E
  • Netflix: +49.0%, 67.60 forward P/E
  • Nvidia: +27.2% YTD, 33.87 forward P/E

Officially, Amazon and Netflix are classified as consumer discretionary stocks, the Journal indicates. The forward P/E ratio for the S&P 500 technology sector was 18.2 times earnings as of February 15, up from just over 10 in 2011, per calculations by Yardeni Research Inc.

The FAANG stocks propelled the market in 2017, but constituents Facebook Inc. (FB), Apple Inc. (AAPL), and Google parent Alphabet Inc. (GOOGL) have lagged Amazon and Netflix in 2018 due to mixed earnings reports and increased regulatory scrutiny, the Journal says. Nonetheless, all three have performed much better than the S&P 500, up 3.9%, 4.1% and 7.1%, respectively, for the year-to-date through February 23.

NFLX PE Ratio (Forward 1y) Chart

Tech Extends Dominance

The S&P 500 Information Technology Index (S5INFT) was up 36.9% in 2017 and has gained 7.5% so far in 2018, through February 23, according to S&P Dow Jones Indices. The respective figures for the full S&P 500 were 19.4% in 2017 and 2.8% for year-to-date 2018.

Thus, the ratio of tech stock gains to the advance for the broader market has jumped from 1.9 times in 2017 to 2.7 times so far in 2018. Meanwhile, the S&P 500 Consumer Discretionary Index (S5COND) is up 7.2% for year-to-date 2018, driven almost entirely by the performance of Amazon and Netflix, per data presented by the Journal.

Another way to look at the situation is to note that, per the Journal, the technology sector as a whole accounted for 75% of the increase in the S&P 500 for the year-to-date through February 20. Reclassify Amazon and Netflix from consumer discretionary to information technology, and tech accounted for an astounding 110% of that advance. As a result, all the other constituents of the index combined to reduce its value by 10%. Financials, health care and industrials were up, materials were neutral, while telecom, utilities, real estate, energy and consumer staples were down.

Good News, Bad News

Nonetheless, the bulls note that the fourth quarter earnings season is shaping up as one of the best ever. More than half the companies that have reported so far are beating consensus EPS estimates. Moreover, positive earnings surprises that beat forecasts are being met with subdued reactions among investors. Perhaps expectations about earnings are finally coming into alignment with reality. Likewise, those earning announcements that miss forecasts also are being met with unusual calm. (For more, see also: Why Big Stock Investors Are Bearish Despite Rally.)

On the other hand, the increased dominance of tech stocks in general, and those four leaders in particular, suggest that the market may be in a precarious situation. If those stocks stumble for whatever reason, sending the S&P 500 downward, that may touch off a general stampede to the exits, particularly among investors in index funds and ETFs. Meanwhile, the Investopedia Anxiety Index (IAI) is recording extremely high levels of concern about the securities markets among our millions of readers worldwide. (For more, see also: 6 Forces That May Push the Stock Market Lower.)