As the nine-year bull market is injected with a surge of volatility on uncertainty over tightening monetary policy and a potential global trade war, the Street has targeted some industries as better positioned to weather the storm than others. One such industry is the high-flying tech space, which has seen $5 billion poured into industry-focused funds this year, as reported by The Wall Street Journal, fueling high returns for investors. (See also: Goldman & Boeing: Drivers of 2018 Dow Gains.)
Tech-focused funds received more than any other major sector in 2018, according data from Thomson Reuters Lipper. The multi-billion-dollar figure for the first two and a half months of the year represents approximately half of what the segment generated for all of 2017 and sparks concerns that the market is too dependent on a few big stocks to continue momentum, such as FAANG components Facebook Inc. (FB), Google parent Alphabet Inc. (GOOG), Apple Inc. (AAPL), Netflix Inc. (NFLX), and Amazon.com Inc. (AMZN).
Nearly 80%, or $3.9 billion of the $5 billion in inflows, occurred in January, likely all of it before the market peaked on Jan. 26. The first month in the year marked the highest inflows for tech-focused funds since March 2000, when the dot-com bubble was at the peak of its frenzy. Over the same period, real-estate-focused funds have lost about $3.9 billion, while utilities have seen $900 million pulled from funds, and energy-related funds have lost $326 million.
Winners and Losers Emerge on Fears of Global Trade War
The shift away from more value-oriented plays to industries such as tech, banking and health care has been driven by some of the Trump administration's recent plans, such as slapping stiff tariffs on steel and aluminum imports. A recent report by Credit Suisse, outlined in a recent story by Investopedia's Mark Kolakowski, suggests that auto, industrial and retail industries are most at risk of a global trade war, since they are heavily reliant on global supply chains. Tech is a safer bet, wrote the analysts, given that imposing tariffs on tech services and software is much more difficult. (See also: Why Techs, Banks May Outperform In a Trade War.)
On the more bearish side, some analysts are concerned that a surge in tech interest threatens to stretch already inflated tech valuations. Amazon currently trades at 161 times its forward earnings over the next 12 months, compared to Netflix stock at 106 times forward earnings and against the S&P 500's average for the metric at 17, as reported by the WSJ. Just eight tech firms have fueled over half of the S&P 500's gains so far in 2018, including Apple, Amazon, Netflix, Alphabet, Microsoft Corp. (MSFT), Cisco Systems Inc. (CSCO), NVIDIA Corp. (NVDA) and Adobe Systems Inc. (ADBE).
Analysts at William Blair call the massive inflow “buying blindly," warning that “once flows reverse, those stocks can drop very quickly.”