Are the ‘Power Five’ stocks creating another bubble?

Comparisons to the 1990s tech bubble can be misleading

Technology has been the best-performing sector of the S&P 500 Index in 2017. As such, some investors are drawing comparisons between today’s technology bull market and the infamous dot-com bubble of the late 1990s, which reached its peak in March 2000.1 Both then and now, technology stocks were catalysts behind major market rallies.

But that’s where the similarities end, in my view. While technology has delivered the best sector performance within the S&P 500 Index over the past three years (July 29, 2014, through June 29, 2017), we are still nowhere near the bubble status of 17 years ago.1

As evidence, consider the five largest publicly traded stocks in the United States: Apple, Alphabet (the parent company of Google), Microsoft, Amazon and Facebook. These are referred to by various acronyms, such as FAANG or FAAMG, but for our purposes we will collectively call this group of technology titans the “Power Five.”

That was then, this is now


Fourth-quarter 2016 earnings largely positive for large-cap growth companies

Investments in R&D lay the groundwork for potential future growth

JohnFrank_smAs fourth-quarter earnings season winds down, it appears that US large-cap companies are on solid footing. Average year-over-year earnings for the S&P 500 Index grew two consecutive quarters to close out 2016 — the first time that has happened in more than two years.1

Large-cap growth companies fared especially well during the fourth quarter, with the Nasdaq-100 Index recording its third consecutive quarter of year-over-year earnings growth. Both the Nasdaq-100 Index and the S&P 500 Index exceeded Wall Street earnings expectations in the fourth quarter — beating average consensus estimates by 7.1% and 2.6%, respectively.1


What does it mean to invest in today’s technology companies?

As innovation surges, traditional sector lines are being blurred

JohnFrank_smThe days of traditional technology are dead. The Mac, the Windows operating system and the microprocessor are no longer the sole drivers of revenue for their respective tech companies. Today’s technology companies are increasingly blurring the lines between technology, media, infrastructure and global consumer enterprises.

Technology as a driver of innovation

At the same time, traditionally non-tech companies are either grappling with or embracing technology as a critical driver of innovation and business success. Technology is no longer the shiny front end of the organization or just a feature that can be used to differentiate a company. Today, technology is integrated into every aspect of most companies.

Imagine trying to run a company without Microsoft Office or a web browser. As digital technologies continue to transform the economy, legacy companies are fighting to remain competitive and participate in emerging trends. Walmart’s acquisition of the e-commerce site to compete with Amazon is a prime example of how technology has forced the hand of corporate institutions to embrace the future or risk obsolescence (Amazon comprised 6.31% of PowerShares QQQ as of Dec. 31, 2016.)

For companies beyond the information technology (IT) sector that are succeeding — those that are growing their balance sheets, creating new products and jobs — technology is becoming their lifeblood. Technology’s critical role across today’s economy sparks some interesting questions about what we consider technology today and how to invest in it.

What does technology mean today?