Apple‘s rally to a $3 trillion market valuation earlier this week has re-focused investors’ attention on the mammoth growth stocks that accounted for a large chunk of the S&P 500’s gain in 2021, and whether they can continue pushing the index higher in the new year.
Microsoft, Apple, Nvidia, Alphabet, and Tesla accounted for nearly a third of the S&P 500’s total return last year, according to data from UBS Global Wealth Management. That’s more than double the average contributed by the index’s five largest gainers since 1985, the bank said. The S&P 500 returned 28.7% last year, including dividends.
The explosive growth delivered by giant, tech-focused names has helped fuel the S&P’s meteoric rise over the past decade. Yet some investors worry big tech stocks may have a tougher time delivering big gains this year, in the face of stretched valuations, expectations of higher Treasury yields and a more hawkish Federal Reserve.
At 27.9, the forward price-to-earnings ratio of the S&P 500 tech sector is near its highest level since 2004, and well above the 21.3 of the broad market, according to Yardeni Research. Nvidia trades at 56 times forward earnings, while Tesla, part of the consumer discretionary sector, trades at 119 times forward earnings.
Rich valuations could make those stocks more vulnerable to higher yields, with the Fed expected to raise rates several times this year, said Saira Malik, chief investment officer of global equities at Nuveen.
“The broad returns in…