US stocks are roaring, with large tech companies propping up massive rises in the S&P 500, but investors need to be selective.
A record close for the S&P 500 and $2 trillion (£1.52 million) valuation of Apple (NASDAQ:AAPL) have meant another landmark week in the remarkable performance of US equities during the Covid-19 pandemic.
Even though the cautious tone of US Federal Reserve minutes published on Wednesday night cooled Wall Street sentiment, the S&P 500 is still 51% higher than its low point in March.
The fact that the benchmark of corporate America managed a new record close of 3,389.78 on Tuesday reflects the impact of central banks adding unprecedented liquidity to markets through quantitative easing and ultra-low rates.
Beneficiaries include Apple, whose shares surged 58% in the year-to-date to make the iPhone maker the first American company with a $2 trillion valuation. It is only two years since Apple passed the $1 trillion landmark.
Like many other tech firms, demand for Apple products and services has been fuelled by consumers working and studying from home during pandemic lockdowns.
But can the boom in US markets last? Mark Haefele, chief investment officer at UBS Global Wealth Management, thinks that the S&P 500 reaching a record high is no obstacle to further gains, although he adds that now is the time for investors to be much more selective.
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“We believe central banks will remain in stimulus mode for the foreseeable future, supporting risk assets but creating both opportunities and challenges for investors.”
The six largest US technology stocks — Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Netflix (NASDAQ:NFLX) and Google holding company Alphabet (NASDAQ:GOOGL) — have accounted for a large slice of the gains so far this year. Their combined valuation now accounts for over a fifth of the US stock market and more than any other stock market except China.
But Haefele recommends that investors with large exposure to these mega-cap tech stocks should think about rebalancing into a broader range of investments offering the potential to benefit from trends accelerated by Covid-19.
UBS sees particular upside for companies involved in 5G and other enabling technologies:
“In addition, as the global recovery gradually takes hold, the next leg up in the market may be driven by cheaper sectors that have trailed behind in the rebound, such as cyclical and value stocks.”
Haefele likes the look of US mid-cap stocks, which are poised to regain lost ground should the economic recovery gain traction and broaden out.
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The outlook for the US economy, however, remains hugely uncertain after the minutes of the Federal Reserve's meeting in late July noted that the rebound in employment was already slowing. Some policymakers suggested that they may need to ease monetary policy further, having already slashed interest rates to zero and bought trillions of dollars in bonds.
One option may be to adopt caps or targets for Treasury yields. But with limited consensus on the next move, US equities came under pressure alongside a rise for the US dollar last night.
Against this uncertain backdrop, it appears that Airbnb is still intent on joining the stock market after it emerged yesterday that the home rental company had filed confidential initial public offering (IPO) registration documents with US regulators.
The San Francisco-based company is thought to be targeting a listing by the end of the year, having seen its original flotation plans disrupted by the pandemic. With many travellers shunning hotels due to the coronavirus, Airbnb has seen an increase in demand after reporting that one million nights were booked in a single day for the first time since March.
Driven by a successful technology platform and the rise of the sharing economy, over 400 million people have used Airbnb since the business was started in 2008 by Brian Chesky, Joe Gebbia and Nate Blecharczyk.
It was valued at $18 billion in April when it raised $2 billion in debt from investors, compared with almost $30 billion a year ago during the peak of Wall Street's IPO boom.
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