The big 5 technology stocks now represent 25 of the SPs value what could disrupt these behemoths

As of writing in early December, the S&P 500 is trading up 16% in 2020 – despite a pandemic, a steep drop in value, and a bear market earlier in the year. Yet most of this rally has been down to just a handful of stocks.

The big tech stocks, specifically Facebook, Apple, Amazon, Alphabet and Microsoft, have had a phenomenal year. Lockdown measures fast-tracked the digital transformation process across industries, accelerating many trends that already existed pre-pandemic. Demand for stocks in these digital-focused industries surged.

Given that the S&P is a capitalisation-weighted index, the FAAMGs have driven gains. According to a senior analyst at S&P Dow Jones Indices, without the contribution of 11 large, mostly technology stocks, the S&P’s total return would have been negative for the year.

Tech Companies & the US Markets

So, what could 2021 have in store for these mega-cap tech stocks – more of the same, or could we see a slowdown or even a reversal of the seemingly insatiable bullish trend?

Is WFH the new norm?
Demand surged for products and services offered by the big five throughout the pandemic, amid increased work from home (WFH) tendencies and the digital revolution. Adoption of these trends will inevitably slow a bit, but they’re unlikely to reverse any time soon.

So, while the initial demand spike is expected to ease, the multi-year subscriptions that often come with these products will mean customers are well and truly entwined in the FAAMGs’ ecosystems for the foreseeable. The WFH trend, in addition to many other areas of digital transformation, is unlikely to return to the old norm. The fact that these trends were solidly in place before the pandemic even hit gives them staying power. In other words, a return to pre-pandemic norms is not expected to disrupt these mega caps.

The Impact of a COVID 19 vaccine.
In addition to an increase in demand for products and services offered by the big five, the FAAMGs have also taken on a safe-haven status across the pandemic which has driven demand higher. Quite simply, investors were buying into these stocks on the assumption that they would rise in value despite the ongoing COVID crisis and the economic fallout from the pandemic.

The arrival of a vaccine and its broad distribution early next year has already seen risk appetite rise and safe-haven demand slip. The FAAMGs struggled to advance and even lost ground on the days of vaccine euphoria. As the vaccine rolls out and COVID fears ease, demand for these tech stocks could lessen.

Covid 19 - Rally broadens out
While the big five have driven the lion’s share of the rally across the year, that changed in November as vaccine news and easing election uncertainty sent other stocks soaring. The S&P gained 11% in its best month since April. According to FactSet, 467 stocks in the S&P rose, the largest share of any month since April. In October, this was just 212. In September it was 153.

As the economic outlook has brightened, cyclical sectors have outperformed the dominant tech stocks. With US consumers still spending well – plus with services and manufacturing PMI surveys remaining resilient despite rising COVID numbers – optimism is growing that the economy could bounce back next year.

We could expect to see the rally broaden out further, which could see the FAAMG rally at least slow. Interestingly, the tech sector is this year’s top performer but barely advanced in November while other sectors, such as financials, surged 17%. The downtrodden energy sector jumped 27%.

Joe Biden
The policies of the new US President are expected to be a mixed bag. On the one hand, higher corporation tax and capital gains tax could drag on US stocks – although that could be more than offset by ample government fiscal stimulus spending.

The outlook for US tech isn’t quite so soothing, and the new US President could in fact be one of the largest risks to the FAAMGs in the coming year. Joe Biden and the Democratic party in general have been more critical of the increasing concentration of economic power in the tech giants. The threat of regulatory action is clear and present.

Even under the Trump Presidency, the Department of Justice pursued anti-trust action against Apple and Google. The appetite to rein in tech giants is not new but it may get fresh legs under Biden. Signs of regulatory reforms, a Frank-Dodd Act for tech, or even talk of splitting some of these firms up could bring a swift end to the impressive rally. That said, should Republicans retain the hold over the Senate, the Democrats could struggle to push some of these more aggressive policies through Congress.

Learn more about the Economic, geopolitical and social implications of a Biden presidency

For further insight into what 2021 could have in store for the markets take a look at other titles in the series:

What does the end of the Brexit transition period mean for the markets moving forwards?

Will US Chinese relations continue to deteriorate in 2021?

StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Please ensure you fully understand the risks involved by reading our full risk warning.

FOREX.com is a trading name of StoneX Europe Limited, and FOREX.com/ie is a domain operated by StoneX Europe Ltd, a member of StoneX Group Inc. StoneX Europe Ltd, is a Cyprus Investment Firm (CIF) company registered to the Department of Registrar of Companies and Official Receiver with a Registration Number HE409708, and authorized and regulated by the Cyprus Securities & Exchange Commission (CySEC) under license number 400/21. StoneX Europe is a Member of the Investor Compensation Fund (ICF) and has its registered address at Nikokreontos 2, 5th Floor, 1066 Nicosia, Cyprus.

StoneX Europe Limited is registered with the German Federal Financial Supervisory Authority (BaFin). BaFin registration ID: 10160255

FOREX.com is a trademark of StoneX Europe Ltd, a member of StoneX Group Inc.

The statistical data and the awards received refer to the Global FOREX.com brand.

This website uses cookies to provide you with the very best experience and to know you better. By visiting our website with your browser set to allow cookies, you consent to our use of cookies as described in our Privacy Policy.

Through passporting, StoneX Europe is allowed to provide its services and products on a cross-border basis to the following European Economic Area ("EEA") states: Austria, Bulgaria, Croatia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden.

Additionally, StoneX Europe Ltd is allowed to provide Investment and Ancillary Services to the following non-EU jurisdiction: Switzerland.

StoneX Europe Ltd products, services and information are not intended for residents other than the ones stated above.

Tied Agent Information: KQ Markets Europe Ltd with Company No. HE427857.
Address: Athalassas 62, Mezzanine, Strovolos, Nicosia Cyprus.
Services Provided: Reception and Transmission of Orders.
Commencement Date: 06/12/2022
Website: KQ Markets - CFD Trading | KQ Markets

We may pay inducements, such as commissions or fees, to affiliates or third-party introducers for referring clients to us. This is in line with regulatory guidelines and fully disclosed where applicable.

StoneX Europe Ltd may make third party material available on this website which may contain information included but not limited to the conditions of financial markets. The material is for information purposes only and does not contain, and should not be construed as containing, investment advice and/or investment recommendation and/or an investment research and/or an offer of or solicitation for any transactions in financial instruments; any decision to enter into a specific transaction shall be made by the client following an assessment by him/her of their situation. StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.