A spate of earnings reports in coming weeks is set to test a recent bounce in technology and other megacap stocks, a category whose leadership position in U.S. markets has faltered after last year’s deep selloff.
Now, however, the focus is shifting to whether these companies can withstand a widely expected economic downturn while supporting valuations that some investors believe are too high. That dynamic echoes a pattern seen after the market’s dot-com bubble burst after the turn of the century. The six biggest stocks at that time saw their collective weight in the S&P 500 decline to 5% from a peak of 17% over a number of years, according to Strategas.
A critical question for many megacaps, once heralded for their stellar growth, is whether they can increase revenue and profits significantly while cutting costs in the face of a possible recession. Valuations for tech and megacap companies have moderated after last year’s selloff, though they still stand above those of the broader market. The S&P 500 tech sector still trades at a roughly 19% premium to the broader index, above its 7% average of the past 10 years, according to Refinitiv Datastream.The Wells Fargo Investment Institute counts tech as one of its favored U.S. sectors.