These tech stocks have compelling valuations: RBC's lead analyst

Tech Stocks

These tech stocks have compelling valuations: RBC's lead analyst
Mark Mahaney of RBC Capital Markets joins “Squawk Alley” to discuss what he’s looking at in the tech sector.

It’s no secret that a handful of tech giants have been dominating the stock market, but their leadership has reached a level that is raising eyebrows on Wall Street as being unsustainable.

The top five U.S. companies — Apple, Microsoft, Alphabet, Amazon and Facebook — now make up 18% of the total market capitalization of the S&P 500, the highest percentage in history, according to Morgan Stanley.

“A ratio like this is unprecedented, including during the tech bubble,” Mike Wilson, the bank’s head of U.S. equity strategy, said in a note Sunday. “Capital concentration is following corporate inequality like never before.”

These mega tech firms have been the front-runners in this record-long bull market as investors bet on superior growth and dominant market share in their respective industries. They were the biggest contributors to the market’s historic gains last year and the trend shows no signs of stopping in 2020. However, multiple Wall Street strategists are sounding alarms on the increasing dominance of Big Tech, warning of a potential pullback in the stocks ahead.

Apple’s weighting in the S&P 500 surpassed 4% in October, the sixth time the iPhone maker has crossed that threshold. But if history is any guide, it could be a ominous sign for the stock, according to Leuthold Group analyst Phil Segner.

He noted during the previous five times when Apple topped the 4% threshold, the stock underperformed the S&P 500 by nearly 9% on average in the next 12 months.

“With history as a guide, its most recent climb into the 4% Club looks like another selling opportunity,” Segner said in a note.

Going back to 1990, only five stocks — Apple, Microsoft, Generic Electric, Cisco Systems and Exxon Mobil — have claimed more than 4% of the S&P 500, and their leader status has typically been short-lived, Segner noted. General Electric stayed the longest — 15 months — above the threshold, while Cisco only lasted a month, he said.

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These tech stocks have compelling valuations: RBC's lead analyst