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Big-Cap Tech Concentrates Face Potential 5%-10% Pullback as Summer Arrives

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The Risk of Too Great a Concentration in Big Cap Tech Stocks

The Russell Reconstitution and Concentration Risks

The risk of excessive concentration in big cap tech stocks has been a persistent concern for many analysts. Wells Fargo's Chris Harvey had warned of the increased concentration risks among mega-cap tech stocks for some time, and the Russell reconstitution on Friday was the perfect opportunity for those needing to move large blocks of tech stock. NYSE and Nasdaq volumes rose more than 50% higher than normal, and so much stock was available to buy and sell that large blocks could be bought and sold without significantly moving prices. Now, with seasonally lower volumes ahead, sky-high prices for mega-cap tech, and a renewed concern that interest rates may go up as central banks work to curb inflation, there is a renewed focus on tech megacaps.

Tech Megacaps and Overdue Pullbacks

Many finance professionals believe that a 5%-10% pullback is overdue, particularly for big cap tech. The correction may have already started; last week many big tech names, particularly semiconductors, experienced decreases of the high-to-mid-single digits. With Apple, worth as much as the GDP of France, Microsoft bigger than Italy, Alphabet as substantial as Mexico, and Tesla more substantial than Taiwan, there are noticeable concerns about current market evaluations.

The Sustainability of the Current Chart

According to Chris Harvey, as of now, eight companies have market caps that place them in the top 25 of national GDPs. To put it into perspective, ten years ago, there were none. By comparison, back in 1999 when this tech-led market was at its best, there were ten such companies, of which only Microsoft remains in the top ten. Harvey asks if the current chart featuring Apple larger than France and Tesla greater than Taiwan is still sustainable, using the 1999 chart as a point of reference. However, tech bulls like Dan Ives at Wedbush still believe that AI has the same effect on tech as the internet did in the 1990s, with the tech industry predicted to rise by 12%-15% in the second half of this year, according to Ives.

The Future for Tech Megacaps

The air of unpredictability around tech megacaps heightens the risk, with market watchers advising caution. Investors need to keep their eyes peeled for stock shifts and increases in cryptocurrency as online transactions become more prevalent. It may be beneficial for investors to assess their risk tolerance and diversify their portfolios to combat the concentration risks that come with investing in tech megacaps.

The concentration risks among big cap tech stocks continue to be a concern among analysts. As market evaluations soar, investors are advised to take caution and assess their risk tolerance when investing in tech megacaps. While some experts still believe that AI will have the same effect on tech as the internet did in the 1990s, there is an air of unpredictability surrounding tech megacaps. Many finance professionals believe that a 5%-10% pullback is overdue, particularly for big cap tech, and the correction may have already started. As a new business looking to invest in the stock market, it is important to understand the concentration risks of investing in big cap tech stocks and to diversify your portfolio to mitigate those risks. It is also important to keep an eye on stock shifts and increases in cryptocurrency as trends in online transactions continue to evolve. Overall, while investing in tech megacaps may offer impressive returns, it is important to proceed with caution and take steps to mitigate risk.

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