The US tech stock boom seems to be unstoppable. While it continues to attract strong capital inflows, some keep wondering if the narrow-based rally powered mostly by tech counters suggests the party could be ending.
PowerShares QQQ Trust, the biggest tech ETF in the US, drew US$1.8 billion of fund inflows on May 23, the highest single day number since September 2010.
Just take a look at a few leading plays. Apple has gained 33 percent year to date, Facebook and Amazon both have risen 28 percent. The three together contributed one-third of the gains of the S&P500.
Does that mean the US stock rally is not broad-based enough to qualify as healthy and sustainable?
According to statistics published by AQR Asness as quoted in a Bloomberg article, between 1994 and 2014, the average annual return of S&P was 9.3 percent, out of which the best 10 stocks contributed about 4.1 percentage points. In other words, it’s not unusual for leading counters to contribute a significant portion of market gain.
Also, the tech share rally seem to be underpinned by matching earnings growth.
Although QQQ prices have gained 18 percent year to date, far exceeding the S&P500’s 8 percent growth, the tech sector is expected to grow its earnings by 19 percent this year, outstripping the S&P500’s estimated 9.2 percent earnings growth.
The Bloomberg article also tried to use the advance-decline line to find out how divergent is individual stock movement and overall market movement.
While the gauge is not always correct in predicting market collapse, it did a good job by sending out signals one year before the dot.com bust. But still, the divergence situation is not extreme enough to warrant a warning to investors.
The full article appeared in the Hong Kong Economic Journal in Chinese on May 29
Translation by Raymond Tsoi
[Chinese version 中文版]
– Contact us at firstname.lastname@example.org