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‘Nifty-Fifty’ All Over Again? Why Investors Should Fear Big Tech Rally

Last Updated September 23, 2020 2:10 PM
Chinmay Pandya
Last Updated September 23, 2020 2:10 PM
  • Apple, Microsoft, Google, Amazon, and Facebook have added a staggering $2.7 trillion to their combined market caps since March lows.
  • High expectations and the Fed’s interventions drove the stock market’s rally, led by these giants.
  • These stocks could face the same fate as the ‘Nifty-Fifty’ of the 1970s.

Following the U.S. stock market crash of March, Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), Facebook (NASDAQ:FB), Apple (NASDAQ:MSFT) and Microsoft (NASDAQ:MSFT) combined have added $2.7 trillion to their market cap.

Tech giants' market caps.
Big tech has surged dramatically in the space of five months. | Source: Twitter 

Meanwhile, the stock market’s disconnect with the real economy  has gotten worse.

While U.S. GDP has lost $2 trillion, the stock market has added $4 trillion to the total market cap of companies in the S&P 500.

GDP and stock market comparison.
Shocking divergence in the real U.S. GDP and the stock market. | Source: Twitter 

Of course, the Federal Reserve’s balance sheet explosion has aided the stock market rally since March.

The Federal Reserve's balance sheet vs S&P 500.
The Federal Reserve’s balance sheet has risen in tandem with the S&P 500. | Source: FRED 

The Fed’s balance sheet expansion has been a common factor in the tech giants’ rallies since March. These tech companies, along with Tesla (NASDAQ:TSLA), have carried the stock market higher  over the past four months.

Earnings Expectations Contributed to the Rally

As the economy suffered under government lockdown orders, the big tech giants were in prime position to smash earnings expectations in Q2 .

Video: Big tech could dominate the ‘post-COVID-19’ world

Apple shares rallied more than 10% to make new all-time highs after reporting sales growth of 11% in Q2 2020 results.  Last week’s rally allowed Apple to overtake Saudi Aramco as the world’s most valuable company. 

Amazon’s second-quarter saw the company’s sales take off despite the coronavirus pandemic-induced slowdown.  Its shares rallied post-earnings before undergoing a bit of profit booking.

Meanwhile, Facebook reported revenue growth of 11% despite an ad boycott from various companies.  Its shares gapped up almost 7% post-earnings before a mild selloff.

Alphabet rallied 38% from the March low. After reporting an unprecedented revenue decline , its shares declined post-earnings.

Video: Alphabet reports first revenue decline in history

High expectations from Microsoft made the stock rally 25% from the March lows. After reporting spectacular earnings,  the stock continued its uptrend.

Narrow Market Breadth Indicates a Downturn Could Be Imminent

While Facebook, Amazon, Alphabet, Microsoft, and Apple have returned 35% in 2020, the remaining 495 stocks in the S&P 500 are in the red.

Facebook, Amazon, Alphabet, Microsoft Apple and S&P 500 rally since March
Big tech carries the S&P 500. | Source: Yahoo! Finance 

These giants have carried the stock market on their shoulders; if any one of them drops abruptly, the whole market could enter a downward spiral.

Because of this, analysts at Morgan Stanley have predicted a 10% selloff in the U.S. stock market.

If the prediction comes true, the selloff would be reminiscent of what happened to the ‘Nifty-Fifty’ stocks back in the 1970s.  ‘Nifty-Fifty’ refers to the group of 50 stocks that led the markets to all-time highs in the early 1970s, followed by a 46% crash.  

While these stocks had led the rallies to the top, they also led the nosedive that followed.

Back then, Forbes wrote,

The Nifty-Fifty were taken out and shot one by one.

Could the same happen to the tech giants driving the market rally in 2020?

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author holds no investment position in the above-mentioned securities.