• Apple, Microsoft, Google, Amazon, and Facebook have added a staggering $2.7 trillion to their combined market caps since March lows.
  • High expectations and the Fed’s interventions drove the stock market’s rally, led by these giants.
  • These stocks could face the same fate as the ‘Nifty-Fifty’ of the 1970s.

Following the U.S. stock market crash of March, Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), Facebook (NASDAQ:FB), Apple (NASDAQ:MSFT) and Microsoft (NASDAQ:MSFT) combined have added $2.7 trillion to their market cap.

Big tech has surged dramatically in the space of five months. | Source: Twitter

Meanwhile, the stock market’s disconnect with the real economy has gotten worse.

While U.S. GDP has lost $2 trillion, the stock market has added $4 trillion to the total market cap of companies in the S&P 500.

Shocking divergence in the real U.S. GDP and the stock market. | Source: Twitter

Of course, the Federal Reserve’s balance sheet explosion has aided the stock market rally since March.

The Federal Reserve’s balance sheet has risen in tandem with the S&P 500. | Source: FRED

The Fed’s balance sheet expansion has been a common factor in the tech giants’ rallies since March. These tech companies, along with Tesla (NASDAQ:TSLA), have carried the stock market higher over the past four months.

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Earnings Expectations Contributed to the Rally

As the economy suffered under government lockdown orders, the big tech giants were in prime position to smash earnings expectations in Q2.

Video: Big tech could dominate the ‘post-COVID-19’ world

Apple shares rallied more than 10% to make new all-time highs after reporting sales growth of 11% in Q2 2020 results. Last week’s rally allowed Apple to overtake Saudi Aramco as the world’s most valuable company.

Amazon’s second-quarter saw the company’s sales take off despite the coronavirus pandemic-induced slowdown. Its shares rallied post-earnings before undergoing a bit of profit booking.

Meanwhile, Facebook reported revenue growth of 11% despite an ad boycott from various companies. Its shares gapped up almost 7% post-earnings before a mild selloff.

Alphabet rallied 38% from the March low. After reporting an unprecedented revenue decline, its shares declined post-earnings.

Video: Alphabet reports first revenue decline in history

High expectations from Microsoft made the stock rally 25% from the March lows. After reporting spectacular earnings, the stock continued its uptrend.

Narrow Market Breadth Indicates a Downturn Could Be Imminent

While Facebook, Amazon, Alphabet, Microsoft, and Apple have returned 35% in 2020, the remaining 495 stocks in the S&P 500 are in the red.

Big tech carries the S&P 500. | Source: Yahoo! Finance

These giants have carried the stock market on their shoulders; if any one of them drops abruptly, the whole market could enter a downward spiral.

Because of this, analysts at Morgan Stanley have predicted a 10% selloff in the U.S. stock market.

If the prediction comes true, the selloff would be reminiscent of what happened to the ‘Nifty-Fifty’ stocks back in the 1970s. ‘Nifty-Fifty’ refers to the group of 50 stocks that led the markets to all-time highs in the early 1970s, followed by a 46% crash.

While these stocks had led the rallies to the top, they also led the nosedive that followed.

Back then, Forbes wrote,

The Nifty-Fifty were taken out and shot one by one.

Could the same happen to the tech giants driving the market rally in 2020?

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author holds no investment position in the above-mentioned securities.

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