Outsized returns delivered by Amazon.com, Netflix and other heavyweight technology stocks have made them heroes on Wall Street, but some strategists warn that investors' reliance on them exacerbates the risk of a steep downturn. Amazon's 35 percent surge in 2018 has pushed its market capitalization up to $770 billion, equivalent to 3 percent of the S&P 500 and close behind Apple's nearly 4 percent share of the index. Apple, Facebook, Amazon, Netflix and Google-parent Alphabet have grown their collective market value by more than 40 percent in the past year to $3 trillion, and they now account for a quarter of the Nasdaq Composite Index. Technology stocks have been widely viewed in recent months as a "crowded trade," a situation where most investors have the same opinion, increasing the potential for a volatile selloff if sentiment changes.
"It's a big momentum trade, investors don't care if they're paying 15 or 20 or even 50 times earnings," said Mike O'Rourke, Chief Market Strategist at JonesTrading. "The problem is, once those names start giving up those gains, then the market starts to have problems."
Investors have been attracted to those stocks for good reason: Amazon's revenue ballooned 31 percent to $178 billion last year, while Netflix is expected by analysts on average to more than double its net income to $1.2 billion in 2018. An expected interest rate hike by the U.S. Federal Reserve on Wednesday may not have a strong effect on technology companies, which generally rely less than other kinds of companies on debt.