Many investors buy index funds instead of buying shares of individual stocks. During the recent stock market bubble, the “FAANG” (Facebook, Amazon, Apple, Netflix and Google) market caps drove the indexes higher but also became a disproportionate share of the entire market’s capitalization. Together, six stocks — Apple, Microsoft, Alphabet, Amazon, Netflix and Meta — still account for nearly 23% of the S&P 500’s value.
The share prices of these tech stocks are partly driven by actual earnings but also by the “story” of fast future growth. This is reflected in the rising P/E ratio of the SPX, which has dropped in the past 10 months but is still in bubble territory.
Rising interest rates have brought down the prices of many growth stocks but earnings are just being reported.
Microsoft and Google’s Parent Alphabet Lead Tech Stocks Lower After Reporting Slowing Sales Growth
By Caitlin McCabe, The Wall Street Journal, 10/26/2022
Tech stocks dove Wednesday morning, pushed lower by disappointing results late Tuesday from Microsoft and Google parent Alphabet…[end quote]
Because these large tech companies are such a heavy proportion of the indexes, index funds will be dragged down with them. Even equal-weight funds such as QQQE will be dragged down since the selling is already spreading across the tech sector.
Be careful out there. The bond market and Fed Chair Powell are predicting a recession and “pain” ahead. The markets have not fully priced in falling earnings yet.
Wendy