The big 5 technology stocks now represent 25% of the S&P's value - what could disrupt these behemoths?

The S&P 500 has rallied 16% in 2020 - most of this rally has been down to just a handful of stocks, as the pandemic fast tracked digital transformation. What could impact the tech giants in the coming year?

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As of writing in early December, the S&P 500 is trading up 16% in 2020 – despite a pandemic, a steep drop in value, and a bear market earlier in the year. Yet most of this rally has been down to just a handful of stocks. 

The big tech stocks, specifically Facebook, Apple, Amazon, Alphabet and Microsoft, have had a phenomenal year. Lockdown measures fast-tracked the digital transformation process across industries, accelerating many trends that already existed pre-pandemic. Demand for stocks in these digital-focused industries surged.

Given that the S&P is a capitalisation-weighted index, the FAAMGs have driven gains. According to a senior analyst at S&P Dow Jones Indices, without the contribution of 11 large, mostly technology stocks, the S&P’s total return would have been negative for the year.

Tech Companies & the US Markets

So, what could 2021 have in store for these mega-cap tech stocks – more of the same, or could we see a slowdown or even a reversal of the seemingly insatiable bullish trend?

Is WFH the new norm?
Demand surged for products and services offered by the big five throughout the pandemic, amid increased work from home (WFH) tendencies and the digital revolution. Adoption of these trends will inevitably slow a bit, but they’re unlikely to reverse any time soon. 

So, while the initial demand spike is expected to ease, the multi-year subscriptions that often come with these products will mean customers are well and truly entwined in the FAAMGs’ ecosystems for the foreseeable. The WFH trend, in addition to many other areas of digital transformation, is unlikely to return to the old norm. The fact that these trends were solidly in place before the pandemic even hit gives them staying power. In other words, a return to pre-pandemic norms is not expected to disrupt these mega caps.

The Impact of a COVID 19 vaccine.
In addition to an increase in demand for products and services offered by the big five, the FAAMGs have also taken on a safe-haven status across the pandemic which has driven demand higher. Quite simply, investors were buying into these stocks on the assumption that they would rise in value despite the ongoing COVID crisis and the economic fallout from the pandemic. 

The arrival of a vaccine and its broad distribution early next year has already seen risk appetite rise and safe-haven demand slip. The FAAMGs struggled to advance and even lost ground on the days of vaccine euphoria. As the vaccine rolls out and COVID fears ease, demand for these tech stocks could lessen.

Read more about the Covid vaccine and market implications

Covid 19  - Rally broadens out
While the big five have driven the lion’s share of the rally across the year, that changed in November as vaccine news and easing election uncertainty sent other stocks soaring. The S&P gained 11% in its best month since April. According to FactSet, 467 stocks in the S&P rose, the largest share of any month since April.  In October, this was just 212. In September it was 153.

As the economic outlook has brightened, cyclical sectors have outperformed the dominant tech stocks. With US consumers still spending well – plus with services and manufacturing PMI surveys remaining resilient despite rising COVID numbers – optimism is growing that the economy could bounce back next year. 

We could expect to see the rally broaden out further, which could see the FAAMG rally at least slow. Interestingly, the tech sector is this year’s top performer but barely advanced in November while other sectors, such as financials, surged 17%. The downtrodden energy sector jumped 27%.

Joe Biden
The policies of the new US President are expected to be a mixed bag. On the one hand, higher corporation tax and capital gains tax could drag on US stocks – although that could be more than offset by ample government fiscal stimulus spending. 

The outlook for US tech isn’t quite so soothing, and the new US President could in fact be one of the largest risks to the FAAMGs in the coming year. Joe Biden and the Democratic party in general have been more critical of the increasing concentration of economic power in the tech giants. The threat of regulatory action is clear and present. 

Even under the Trump Presidency, the Department of Justice pursued anti-trust action against Apple and Google. The appetite to rein in tech giants is not new but it may get fresh legs under Biden. Signs of regulatory reforms, a Frank-Dodd Act for tech, or even talk of splitting some of these firms up could bring a swift end to the impressive rally. That said, should Republicans retain the hold over the Senate, the Democrats could struggle to push some of these more aggressive policies through Congress.

Learn more about the Economic, geopolitical and social implications of a Biden presidency

For further insight into what 2021 could have in store for the markets take a look at other titles in the series:

What does the end of the Brexit transition period mean for the markets moving forwards?

Will US Chinese relations continue to deteriorate in 2021? 

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