The seemingly unstoppable tech stocks are coming to a screeching halt. Netflix is down 9% in after-hours trading, with Apple and Microsoft dropping just over 1%. Traders fear a slump of FAANG stocks could spoil the 2020 U.S. stock market bull run.
Tech stocks have been leading the U.S. stock market rally in the past four months. Facebook, Netflix, and Amazon rallied by more than 75% since their correction in March. If tech stocks are at a peak, it could trigger a downtrend in the equities market.
According to Lisa Abramowicz, a business analyst at Bloomberg, tech stock valuations have not been this extreme since 2000.
Tech valuations are the most extreme they’ve been since the 2000 tech bubble, based on the ratio of Nasdaq to small-cap stocks.
The behemoth $2 trillion stimulus package introduced in March kickstarted a V-shape recovery in the stock market.
The biggest beneficiary of the stock market uptrend has been tech stocks, specifically FAANG stocks, as consumer demand shifted to digital products.
But traders are concerned that the rally is becoming overheated. Retail investors have fueled a FOMO-driven rally. In the months ahead, strategists are skeptical if there are sufficient fundamental factors to justify a larger uptrend.
In January 2020, CNBC reported that merely 17.5% of leading technology stocks account for 17.5% of the S&P 500.
At the time, Morgan Stanley analyst Mike Wilson said the dominance of tech stocks over the U.S. stock market is “unprecedented.”
The market capitalization of Apple, Microsoft, Amazon, Facebook, and Alphabet has actually increased since, despite the March crash.
If tech stocks undergo a steep downtrend, it could cause the ongoing stock market rally to slow down.
On June 19, JPMorgan strategists warned that investors have to become more selective with stocks.
A broadly-positive sentiment around the stock market led all types of stocks to rally in Q2 2020.
As the momentum of the rally weakens with “slight fatigue,” JPMorgan said an “indiscriminate approach” to investing could be less effective.
Investors are increasingly evaluating stocks on a case-by-case basis. For example, Tocqueville Asset Management’s portfolio manager John Petrides said the Netflix stock is no longer compelling.
Petrides emphasized that the current business model of Netflix is expensive to sustain, while expectations by analysts remain high. He said:
I’ve been negative on Netflix for quite some time from a valuation standpoint and continue to think the business model is suspect. They have to rely on constantly coming up with original content in order to drive viewership, and that’s expensive.
Whether the retail FOMO among traders on platforms like Robinhood and Charles Schwab would subside remains uncertain. But in recent weeks, investors have been watching tech stocks’ momentum with a skeptical eye.
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 has no position in any of the stocks mentioned.