I believe we are in a passive investing “bubble”, where investors have been blindly buying large cap equities, irrespective of valuation, because they were “big”. There’s no greater example of this than in the big five technology stocks in the USA.
In the year-to-date, just five large technology stocks have accounted for 41% of the gain in S&P500 Index market capitalisation. That is unprecedented but so too are flows into passive products (index funds and ETFs) which have been driving those gains.
The five stocks are Apple, Amazon, Facebook, Microsoft and Alphabet (parent of Google). However, late last week we saw what is the start of some profit taking emerge in these mega-cap US technology stocks. Again, it reminded you that there is NO capital protection in owning what everyone else owns, particularly at such extremes of valuation and positioning.