Why Megacap Tech Stocks Will Likely Continue Leading Markets Higher

Apple, Microsoft, Google, Amazon and Facebook have been responsible for a large portion of the S&P 500 and Nasdaq's gains, and that doesn't look to change anytime soon.
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A familiar group of names has helped propel the Nasdaq to new highs and buttressed the S&P 500 to recover from its March lows.

These are the megacap tech stocks, sometimes referred to by the acronym of the FAAMG stocks for Facebook  (FB) - Get Report, Apple  (AAPL) - Get Report, Amazon  (AMZN) - Get Report, Microsoft  (MSFT) - Get Report and Google/Alphabet  (GOOGL) - Get Report.

Together, these five names, the largest companies by market cap in the country, make up about 20% of the S&P 500 and a whopping 40% of the Nasdaq Composite Index. And they’re all trading at or close to all-time highs, with Amazon up 50% year to date, Microsoft up 26%, Apple up 24%, Facebook up 12% and Alphabet up 7%.

What explains their outperformance through one of the most dramatic economic dislocations in history?

They’ve all been beneficiaries of the massive demand for anything and everything that helps businesses or individuals communicate and transact online during the Covid-19 lockdowns. And their strong balance sheets have led them to better weather the economic storms than their competitors.

“I like to say the crisis has accelerated the inevitable,” says Mark Mahaney, an analyst who covers internet stocks for RBC. “We’ve had two decades of migration of products and services online. And we just accelerated that by one or two years -- compressed into the span of two months.”

So Amazon has obviously benefited from the growth in online retail, Microsoft has seen growing demand for its collaboration and cloud businesses, and Apple’s Services businesses have shown strong improvement, in addition to growing optimism about its upcoming 5G line-up of phones.

As for Facebook and Google, while they saw some dramatic deceleration in ad demand during the initial stages of the lockdown, those numbers have improved considerably in the time since then.

“Those two should be almost back to full growth by the end of this year, if not early next year,” said Mahaney.

What could stand in the way of the FAAMG stocks continuing to dominate and lead the S&P 500 and Nasdaq higher?

The main risks seem to be if there was a major reversal in the gradual opening up of the economy and the re-institution of lockdowns hurting the economic recovery, as well as legal and regulatory risks as several of the tech giants get investigated by different authorities in the U.S. and Europe for anticompetitive and other practices.

Of the two, legal and regulatory actions seem more likely, but such actions often take a long time to have an actual impact on operations, and so look for the largest companies to continue to dominate for at least the near-term.

For better or worse, the fate of the S&P 500 and the Nasdaq rests largely in the hands of Big Tech right now.

Apple, Amazon, Facebook, Microsoft and Alphabet are holdings in Jim Cramer’s Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.