The Nasdaq Composite stock index (.IXIC) is on the cusp of recouping all its losses for the year.
The index, which is powered by big tech companies such as Microsoft Corp. (MSFT), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Alphabet Inc. (GOOG) and Facebook Inc. (FB), was off as much as 24% year to date in late March during the coronavirus-driven market rout. It has rebounded sharply since then, cutting its losses for 2020 to just 0.9%.
Other major stock indexes remain much deeper in the red: The S&P 500 (.SPX) has lost 9.9% this year, the Dow Jones Industrial Average (.DJI) has dropped 15% and the Russell 2000 index of small-cap companies has fallen 21%.
The reason for the Nasdaq’s outperformance? The index is a gauge weighted by market value of the more than 2,700 stocks listed on the Nasdaq Stock Market. The five tech stocks are disproportionately large, accounting for 39% of the index’s total heft.
In the S&P 500, those same stocks make up 20% of the index.
As investors assess a stock market and economy jolted by the coronavirus pandemic, they are betting the technology stocks that drove much of the recent decadelong bull rally will continue to lead the way.
Amazon shares have jumped 34% in 2020, and Microsoft shares have climbed 14%. Alphabet shares returned to positive territory for the year Wednesday after the search giant beat expectations for first-quarter revenue, and Apple edged above the flatline Thursday. Facebook is still down modestly.
After long attracting investors with their promise of growth, the big tech companies have only increased their draw as the U.S. economy confronts the likelihood of a recession. And with so much uncertainty, investors predict these megacap firms have the wherewithal to make it through the coming months.
“While growth is important, that’s more of a long-term thing,” said Amy Kong, chief investment officer at Barrett Asset Management. “But let’s say the virus lasts more than six months, if that’s the base case. Let’s say it’s a one-year thing, or maybe even more: Who out there has the balance sheet to stay alive, to survive out of this whole mess?”
That impulse favors the tech sector. The Nasdaq Composite climbed 15% in April, its best month since June 2000. The index is still down 9.4% from its February record.
The market rebound comes even as the coronavirus and efforts to contain it have thrown millions of Americans out of work and reshaped the landscape for U.S. businesses. In one sign of the impact of the pandemic, new data this week showed U.S. gross domestic product shrank at a 4.8% annual pace in the first quarter, indicating the economy is sliding toward a near-certain recession.
Money managers attribute the resurgence of U.S. stocks at least in part to stimulus efforts by the Federal Reserve and Congress, as well as to positive signs about the spread of the disease and potential for a treatment. The Fed has cut interest rates to near zero and begun purchasing bonds to stabilize markets. Central-bank officials affirmed in recent days that they will take aggressive action to support an economic recovery.
Also this week, U.S. government researchers said a closely watched drug from Gilead Sciences Inc. (GILD) helped hospitalized Covid-19 patients recover faster.
“What we were seeing in March was not long-term fair value,” said Jason Pride, chief investment officer of private wealth at Glenmede. “It was what price the market was willing to put on stocks during the crisis when they could not see the light.”
Many of the hardest-hit stocks this year are those in industries such as travel that have been constrained as businesses and vacationers cancel trips. Shares of Norwegian Cruise Line Holdings Ltd. (NCLH) are down 72% in 2020, and United Airlines Holdings Inc. (UAL) shares have fallen 66%.
Technology giants, by contrast, offer the networking, communications and online-shopping services that are being heavily used as many Americans are required or encouraged to stay at home.
“How many times have you ordered from Amazon?” Mr. Pride asked. “They happen to be in the kind of sweet spot of what people need during this period, as opposed to what’s being shut down.”
Investors are getting a fresh chance this week to assess the durability of the Silicon Valley trade. Alphabet on Tuesday posted strong quarterly results, though company executives cautioned that performance fell off sharply as the pandemic accelerated. On Wednesday, Facebook reported strong growth in the first quarter, with a swell in homebound users helping compensate for a March drop in ad sales. Microsoft pointed to strength in its cloud-computing business and said some of its operations got an extra boost from the pandemic, which has forced many day-to-day activities online.
After the close Thursday, Amazon reported soaring quarterly sales amid a surge in orders from homebound customers, and Apple disclosed a slight uptick in revenue as its growing services business offset declining iPhone sales.
The technology giants continue to face risks, including a wide-ranging antitrust investigation and greater public interest in privacy.
And some investors warn that it is dangerous for such a heavy portion of major indexes to rest in a few stocks.
“The risk is that there’s a selloff,” said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management. “Any one of those companies misses what are already extraordinarily high expectations and have been extraordinarily high expectations for a decade, and they take the whole index down.”
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