Has FAAMNG been overvalued after this year's surge?

Until 2023, the stock prices of US tech giants have been rising. Apple's stock price has risen nearly 35% this year, with a market value exceeding the entire Russell 2000 index. Meta has risen 104.1% so far this year, and Alphabet has risen 39.1%.

Megacap tech stocks have dominated the performance of the US stock market this year, pushing the Nasdaq to a nine-month high.

The NASDAQ-100 recently hit its highest level since April 2022. According to FactSet data, the index rose 3.5% last week and has risen more than 26% so far this year.

Are Megacap Tech Stocks Overvalued?

Michael Landsberg, Chief Investment Officer of Landsberg Bennett Private Wealth Management, said that tech stocks are "severely overvalued." Even companies like Microsoft had a price-to-earnings ratio of 33 times at the end of April, "which seems a bit too expensive for a company whose profit growth is less than one-third of its P/E ratio," he said.

"We don't mind paying for growth, but paying for limited growth doesn't excite us," he said.

Large tech companies still have a significant weight in the S&P 500 index, with Apple, Microsoft, Amazon, Nvidia, and Alphabet now accounting for more than 20% of the index.

BMO Capital Market strategist Brian G. Belski said that the current total weight is significantly higher than the 17% at the beginning of 2023 and is slowly approaching the record level of 22.3% set in 2020.

Negative News for Tech Stocks?

However, Belski admits that this concentration may not necessarily have a negative impact.

The chart below shows that six and twelve months after the market value concentration reaches its peak, market breadth tends to increase, with a rising proportion of outperforming stocks and a relative price increase in equal-weighted indices such as the S&P 500.

Market breadth typically refers to the number of rising stocks relative to falling stocks in a stock index. When there are more rising stocks than falling stocks, market breadth increases.

Market analysts warn that it is certain that the continued rebound of large tech stocks does not mean that they cannot pull back in the near future, as their biggest advantage may be their biggest disadvantage.

Newton Investment Management said, "The biggest short-term risk may come more from the macro itself than the micro itself."

He referred to the debt ceiling negotiations and the uncertainty surrounding the Fed's pause in interest rate hikes.