Mega-cap tech stocks have outperformed the overall SP 500 so far this calendar year and account for most of the benchmark’s year-to-date advance, yet heavy ownership by hedge funds represents a downside risk.P 500 index had rebounded strongly, Goldman equity strategist David Kostin said.
“From a micro perspective, improving fundamental outlooks have sparked the mega-cap tech rally. During 2022, analysts slashed mega-cap tech firms’ 2023 EPS estimates by an average of 27 per cent as growth decelerated sharply amid post-pandemic normalisation. But 1Q 2023 results for mega-cap tech have been better than feared with sales, earnings, and margins beating consensus and prompting upward EPS revisions.”“Their aggregate net profit margin has averaged 20.
Kostin said he saw little reason for mega-caps to falter. “If the current environment of below-trend growth and falling rates persists, megacap tech will likely maintain its valuation premium and continue to outperform.P 500 and ranks in the 51st percentile vs. history. Today, our cross-sectional SP 500 valuation model suggests that investors are attributing the greatest valuation premia to large companies with high long-term growth rates, stable earnings, and high net margins.
“Investors are also ascribing above-average importance to these attributes relative to history. Although attributes vary for each individual stock, mega-cap tech’s fundamentals broadly align with these qualities.” One key risk: “During risk-off events, funds often sell more popular and more liquid stocks first. All five mega-cap tech stocks rank in the top 10 of our Hedge Fund VIP basket. The popularity of mega-cap tech among hedge funds leaves it vulnerable in a major risk-off event.”