In line with the general market's excitement over the economic growth and the possibility of producing a decent COVID-19 vaccine, the S&P 500 index rose by 50% on Friday from its lowest point in March.
Technological stocks this year have outperformed estimates given the slowdown and turnaround in the economy. The Nasdaq has risen to historic peaks in stock values of companies like Facebook, Amazon, Apple, Netflix, Google, and Microsoft.
It is Not Just the S&P500 That is Growing
However, technology stocks are not the only ones reaching new highs in the S&P500 index. An analyst Holger Zschaepitz noted that the growth of technology companies in the Russell1000 index has a much larger percentage component than in the S&P500 index. FAAMG accounts for 37% of the capitalization of the entire index.
Tech is eating the world: The 5 largest stocks – FB, AMZN, AAPL, MSFT, GOOGL – now account for 23% of S&P500, well above the high of 18% in 2000’s, Goldman says. Concentration appears even more extreme within Russell1000 Growth Index. Those same 5 stocks represent 37% of mkt cap. Holger Zschaepitz @Schuldensuehner via Twitter
A continuing rise in innovation penetration and low-interest rates from the Federal Reserve has led to the rationale of strong valuations in software and services stocks.
When Will the Growth End?
The best businesses can also be overpriced at the same time. Citing examples from 1968, it said both IBM and Xerox are expected, during economic cycles, to outstrip the other industries and show their durability.
When a vaccine are be available the excitement of tech stocks could slowly degrade. Given that S&P 500 is highly based on technology stocks, it seems smart to diversify the index in other areas, such as airlines and hotel stocks, that will benefit from the rebound.