Tech Rally Goes Global, Powering Major Stock Indexes to Fresh Records -- 2nd Update

By Riva Gold Features Dow Jones Newswires

Shares of global technology companies are outpacing other sectors this year by the widest margin since the height of the dot-com era, with a handful of key players dictating how markets are performing around the world.

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That dynamic was on display again Tuesday, when the Nasdaq Composite rose 1.06% to end at its 67th record close in 2017, the highest number of record closes in any year.

Shares of Apple Inc. rose 1.9%, while International Business Machines Corp. added 1%. Microsoft Corp. was also up 1.4%, putting the three tech giants among the biggest contributors to the Dow industrials' gains on Tuesday.

Tech gains boosted the broader market. The S&P 500 and Dow Jones Industrial Average also closed at record highs, rebounding after a rare down stretch during the previous two weeks. Blue-chip stock indexes in Europe and Asia closed higher.

In a sign that the tech rally is going global, Chinese internet company Tencent Holdings Ltd. rose 2.4% after intraday gains briefly put the company's market capitalization at around $530 billion, larger than Facebook's $528 billion. Tencent hit $500 billion for the first time Monday.

Just eight companies -- Facebook Inc., Apple, Amazon.com Inc., Netflix Inc., Alphabet Inc., Baidu Inc., Alibaba Group Holding and Tencent -- have increased by $1.4 trillion in market cap in 2017, a sum roughly equivalent to the combined annual GDP of Spain and Portugal.

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Tech giants' powerful user networks, large cash piles and access to consumer data have led many investors to expect the big will only get bigger.

"You need critical mass to support continuing innovation," said Christopher Dyer, director of global equity at Eaton Vance. While there are exceptions, "China and the U.S. would be natural destinations for incremental dollar investment within tech," he said.

While technology companies have helped take U.S. and some Asian stock markets to record highs, less tech-heavy bourses of Europe, Canada and Australia haven't enjoyed the same success.

For MSCI Europe, roughly 85% of its underperformance relative to world stocks can be attributed to differences in the weight and performance of their technology sectors, according to Morgan Stanley.

"There's no doubt the markets that have high tech components will have been the best performers this year," said Paul Markham, a global equities portfolio manager at Newton Investment Management, who has invested in many of the tech behemoths. "The narrow nature of this rally has to be seen as something of a concern...but these are cash-generative companies who are being seen as the bedrock of the new economy."

Global tech stocks are up 42% this year, roughly double the gains of the broad-based MSCI AC World Index. So far in 2017, the tech sector is up 21 percentage points more than the next best sector, materials -- leading by the widest margin of any sector since 1999, according to analysis by Morgan Stanley.

The sector's dominance could make leading markets vulnerable should investors' enthusiasm fade for tech or regulation hamper development of these companies, some analysts say.

But most don't see that happening soon as the giants of this space continue to deliver on earnings, meaning tech could continue to be the differentiator among global markets in the years to come.

Samsung Electronics, Tencent and Alibaba and Taiwan Semiconductor Manufacturing Co. make up a combined 17% of the MSCI Emerging Market Index, even more influential than Facebook, Apple, Netflix, Amazon and Alphabet, which make up around 11% of the S&P 500, according to S&P Dow Jones Indices.

MSCI Europe has a less than 5% weighting to technology companies, compared with a 25% weight in MSCI USA and a 17% weight in MSCI World.

Tech isn't the only factor behind this year's global rally. A synchronized pickup in growth has buoyed earnings around the world, and a continued hunt for yield has left few alternatives to stocks. There are also risks for this year's winning sector, including the prospect of greater regulation or investors simply rotating out of areas that have already climbed a long way.

But some analysts dismiss comparisons with the dot-com boom. Tech valuations in the U.S. are just a fraction of where they were during that era. In early 2000, the S&P 500 tech sector traded at a forward price-to-earnings ratio of 52, according to FactSet. Today, that PE is 19, compared with 18 for the S&P 500 as a whole.

In the third quarter of this year, S&P 500 technology companies beat expectations by the widest margin of any sector, with an earnings growth rate of 21% -- nearly double the next best performer outside the energy sector.

Many market participants think this rally still has legs, pushing record weekly inflows into tech earlier this month, with U.S. and Chinese tech funds gaining particular traction, according to fund-tracker EPFR Global.

"In 1999 [tech companies] were incredibly expensive and didn't yet have a lot of earnings, " said Mark Phelps, an equities chief at AllianceBernstein. But today, not only are their earnings keeping up, "they've got more data, more processing power, and they're giving the consumer a really good product," he said.

Write to Riva Gold at riva.gold@wsj.com

(END) Dow Jones Newswires

November 21, 2017 18:18 ET (23:18 GMT)