Stocks have been on a wild ride the last few months.
Since the March bottom, the S&P 500 has gained nearly 51% and now sits less than 0.5% below its all-time high set back in February. The Dow is up 50% in the same time frame, and the tech-heavy Nasdaq has gained a whopping 61% since the March bottom.
And five of the biggest stocks have contributed substantially to the broader market’s gains.
Facebook (NASDAQ: FB) has added 76% since the market bottom on March 23, Apple (NASDAQ AAPL) has gained 105%, Amazon (NASDAQ: AMZN) has risen 66%, Microsoft (NASDAQ: MSFT) has climbed 53%, and Google-parent Alphabet (NASDAQ: GOOGL, GOOG) is up nearly 44% since the bottom.
BTIG’s Julian Emanuel is warning now that these big market winners may be in a bubble.
“Where the risk is disproportionate is in technology,” Emanuel said. “That’s where our concerns start to bubble up.”
And Facebook, Apple Amazon, Microsoft, and Alphabet may be the most vulnerable following their monster gains since the market bottom.
“There’s a misalignment or a bubble, if you will, in the relative performance between top and bottom sectors,” Emanuel said. “The technology sector has outperformed energy by 78.2% [in the last year]. It’s really an astounding number.”
Emanuel warns that a pocket of bubbles in the tech sector could spark a 10% fall in the Nasdaq.
“This is the kind of time where if you’ve got outside gains in some of these high-flying tech names, you probably want to rotate towards some of the laggards,” BTIG’s chief equity and derivatives strategist said. “It’s sort of a mini portfolio rebalancing the same way we advised clients to pair back their fixed income exposure and buy stocks in late March.”
While Emanuel isn’t sure what will cause the bubble to pop, he said it could be anything from escalating tensions between the U.S. and China, to the presidential election in November, to nothing at all.
However, when the bubble does burst, Emanuel warns that it won’t just be the tech sector that will feel the pain.
“It’s really a sign of the likelihood that further new highs in the S&P will be difficult to accomplish,” Emanuel said. “You could see a pullback certainly given the risk factors that we have in the market presently looking forward towards the election season.”
“We don’t have a problem with where the market is valued overall,” Emanuel added, “certainly not when you’re thinking about zero interest rates for the higher multiples that we saw back in the days of dot-com.”
But even with his present cautiousness, Emanuel is still bullish on stocks for 2021, and said that he expects the economy to rebound from the pandemic.
“You don’t necessarily want to reduce your exposure to stocks, in general,” Emanuel concluded.