The S&P 500’s trillion-dollar club — Microsoft Corp., Apple Inc., Amazon.com Inc. and Alphabet Inc. — is beginning to earn comparisons from Canadian investors who remember Nortel Networks Corp. It’s not that they expect any of the four titans to collapse in the same way that the former tech company did, but there are similar concerns relating to how much benchmark indexes rely on their performance.
At its peak, Nortel was the largest company in Canada and represented one-third of the S&P/TSX Composite by market cap. Nortel imploded in 2001, helping the index lose more than 13 per cent that year.
Today, Microsoft, Apple, Amazon and Alphabet combine to make up more than 16 per cent of the S&P 500. But the trillion-dollar club, which U.S. President Donald Trump recently raved about and dubbed “MAGA” (using the name Google instead of Alphabet), also accounts for 50 per cent of the S&P 500’s returns.
“Those four firms have incredible momentum right now and they’re at risk of the stage where people just chase them up and I don’t want to use the bubble word … but the conditions surface for a bubble,” said Tyler Mordy, president and chief investment officer at Forstrong Global Asset Management Inc.
Mordy owns all four companies through his portfolios, which are comprised of exchange-traded funds that track the S&P 500 and other global indexes.
Disproportionate weightings in particular names may not be an issue when the trillion-dollar club is guiding portfolios higher, but should the four lose favour in the marketplace, they have the potential to drag down ETFs and index funds that include them.
Mordy solves this problem by using sector-specific ETFs that give him exposure to undervalued stocks such as the U.S. banks as a hedge. He’s also diverting his tech exposure geographically from the U.S. to China, where the sector isn’t as frothy and is not exposed to the same regulation risks, he said.
To avoid a collapse, Goldman Sachs Group Inc. chief U.S. equity strategist David Kostin said in a note, the market cap leaders will likely have to continue to exceed growth expectations.
These stocks are the new consumer staples. We’re no longer spending our money on General Mills Cheerios or Campbell’s soup
But BMO Capital Markets chief investment strategist Brian Belski isn’t concerned about them. Investors who are, he said, are incorrectly examining them.
“These stocks are the new consumer staples,” he said. “We’re no longer spending our money on General Mills Cheerios or Campbell’s soup.”
Each stock has its merits, Belski said, and has become an integral part of our lives. Amazon is sabotaging traditional retail, Microsoft is paying dividends and Apple “has more cash on its balance sheet than several provinces in Canada.”
Baskin Wealth Management chief investment officer Barry Schwartz said both the weightings and the rallies that the trillion-dollar club have enjoyed are deserved. The companies are generating the most revenue and earnings growth, he added, and should be integral to every portfolio. He owns each of the four.
“People are underestimating how much bigger they’re going to get,” he said. “The world has never seen companies like these before.”
Schwartz said he immediately adds all four to a new client’s portfolio. And even if it appears a name such as Microsoft has run ahead of itself, he’s buying shares on any weakness.
Still, he protects himself on the downside by not allotting more than five per cent to any single name in his portfolios. The example of Nortel still provides a cautionary warning.
“You looked like a real rebel if you didn’t own Nortel,” Schwartz said. “And then anyone who owned it looked like the biggest idiot, scum-of-the-earth investor after that.”
Financial Post
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