How Did Big Tech Become the Safe Haven Trade?
As the stock market continues to reach record highs, with valuations reaching what some investors fear might be unsustainable levels, concerns about an impending correction have intensified. This nervous market sentiment has led prudent investors to consider rotating a portion of their portfolios towards safer investments that tend to hold up when markets falter.
Historically, when investors seek safe havens during periods of increased market volatility, they tend to land in one of two places: (1) Treasuries if they’re looking for fixed income solutions, or (2) utilities or consumer staples if they want to stick it out with stocks.
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Whether bonds, notes, or bills, Treasuries are backed by the full faith and credit of the U.S. Government and have a longstanding reputation for their creditworthiness, having never defaulted on a debt obligation. This backing essentially guarantees interest and principal payments arriving in full and on time, making Treasuries one of the safest investment options available.
Utilities provide essential services such as electricity, water, and natural gas, all fundamental to the functioning of modern society. Similarly, consumer staples companies produce necessary goods like food, beverages, household items, and personal care products. These goods are basic daily necessities and therefore are in constant demand regardless of economic conditions; this is why investors perceive them to be the safest sectors of the broader stock market.
Following the COVID-19 bear market that began in early 2020, there has been a shift in market dynamics where “big tech” has become the new go-to for stability. The ascent of companies like Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), and Microsoft (MSFT) to "safe haven" investments marks a significant shift in investor psyche.
This shift suggests a growing investor preference not only for the perceived stability of these tech giants, but also their growth potential. Rather than simply being contented to receive dividends from utilities and staples or interest payments from Treasuries while they wait for markets to normalize, investors are showing a penchant for a blend of both stability and innovation.
The sheer size and influence of big tech companies in the market play a crucial role in their safe haven appeal. Their significant weight in major indices like the S&P 500 means that their performance can sway market direction, often stabilizing the broader market during downturns. Additionally, the positive investor sentiment surrounding these companies—driven by their past successes and perceived future potential—contributes to their allure as safe investments.
For instance, Apple’s cash reserve rivals the GDP of some countries, granting a substantial cushion during economic downturns. And Microsoft’s revenue mix extends beyond software and into cloud computing, support services, and artificial intelligence, just to name a few. Such financial stability combined with consistent revenue growth and profitability makes these companies less susceptible to market volatility. Their ability to generate steady cash flow, even in adverse conditions, reassures investors seeking stability.
The impact of this changing market dynamic isn’t all positive. The financial power of big tech companies could further accelerate innovation since these firms have the capital to invest in research and development, acquire competitors, and enter into new ventures during down markets. We have, however, already begun to see challenges in antitrust and regulatory domains, as their growing dominance threatens to stifle competition in some areas.
Additionally, the concentration of investment flows into big tech has become a self-fulfilling prophecy. The ever-increasing allocation to these stocks drives their prices higher, further cementing their dominance in the index, compelling even more investment into these companies. And as more money is required to flow into these stocks to replicate the holdings of the major indexes some exchange traded funds are designed to track, their market capitalizations grow even larger.
With AAPL, GOOGL, AMZN, and MSFT presently accounting for nearly 25% of the S&P 500 index’s overall market capitalization, movements in the stock prices of these tech giants have a magnified effect on the overall market indices. This may be a good thing for tech investors near term, but not so much for intermarket dynamics long-term. Such concentration means that if one company were to experience any significant operational issues, it could have systemic impacts on the wider economy and financial markets.
In recent years, big tech stocks haven’t simply been matching the market during periods of heightened volatility—they’ve been outperforming it by a wide margin. Consider that over the four years from March 1, 2020 to February 29, 2024, the annualized return of the S&P 500 index is approximately 15% compared with more than 26% for AAPL, GOOGL, AMZN, and MSFT combined over that same period.
The foundational principle of a diversified investment portfolio is to spread risk across various assets or sectors and mitigate the likelihood that the underperformance of a single asset will meaningfully impact the overall portfolio's returns. But, as big tech stocks have consistently led market gains, fund managers have succumbed to pressure to overweight these stocks to match or outperform the index, leading to herd behavior.
That is not to say that these big tech companies will flounder tomorrow, or ever. Rather, the concern is that the heavy reliance on a handful of tech giants introduces a form of systemic risk into each investor’s portfolio, where the fortunes of many are closely tied to the performance of very few. Therefore, while these companies have been pillars of strength and growth over the past four years, the overreliance on them could potentially undermine the resilience of the broader markets, making it imperative for investors to assess and manage their exposure to these tech giants carefully.
Investors may be rotating into big tech names right now because it’s familiar. The dominant market positions of these tech giants have redefined investor perceptions, strategies, and expectations. However, true safe havens such as Treasuries have perhaps been the most consistent asset class to provide portfolio protection in times of heightened volatility since the S&P 500 index’s formation in the mid-1950s.
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Malcolm Ethridge, CFP® is an Executive Vice President and fiduciary Financial Advisor with CIC Wealth Management, based in the Washington, DC area. He is also the Managing Partner of Capital Area Tax Consultants.
Malcolm’s areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
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Disclosures:
CIC Wealth, LLC does not provide legal or tax advice. Be sure to consult with your tax and legal advisors before taking any action that could have tax consequences.
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