Can big tech continue to dominate?

Valuations of big tech firms have soared in recent years, with a significant boost to share prices during the Covid-19 pandemic. The widespread shift to working from home and reliance on e-commerce has also increased revenues for these mega-cap firms.

But could tech’s dominance be threatened by the emergence of a Covid-19 vaccine and a new Democratic president putting harsher restrictions on the US tech juggernauts?

Henk Grootveld, manager of Lombard Odier’s Golden Age fund, believes the joint Pfizer/BioNTech discovery of a 90%-effective vaccine will put a dampener on exponential growth, and is a far greater risk to tech firms than the US presidency. ‘Tech firms will no longer be the only companies that can show good growth. Growth will become less scarce as economies open up, and the premiums for the big tech firms will no longer be justified.’

Apple, Microsoft, Amazon, Facebook and Alphabet currently dominate the S&P 500, and account for around a quarter of the index on a market cap basis. The vast majority of the gains on the index this year have come from these five firms, adding $12.4tn (£9.6tn) to their combined value.

Although Grootveld believes that growth will slow among the tech leaders, he said that they will ‘continue to dominate the index’ due to their already vast size. He said there would be a less-concentrated selection of firms that would grow in the coming years, but that it would take a significant surge for a single company to match one of the mega caps.

Other investors have also predicted a style rotation in the market. JP Morgan Cazenove said earlier this month, before the vaccine announcement, that there will be a shift to value. It recently took profits on its long-standing tech overweight position in favour of banks and insurance stocks.

Although Legal & General Investment Management (LGIM) maintains its overweight in US tech, the fund house is taking a barbell approach by investing in unloved areas such as European travel and leisure stocks.

Multi-asset fund manager Chris Teschmacher said that these ‘laggards’ would benefit from the normalisation in the market after the vaccine announcement, having performed poorly earlier in the year.

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