Stomach-Churning Stock Swings Draw Red Line Under the Big in Big Tech

(Bloomberg) — Millions of ordinary investors rode Facebook on the way up, whether they fully realized it or not. Now, they’d better brace for the ride down.

The stomach-churning collapse of Facebook parent Meta Platforms Inc. on Thursday — a one-for-the-record-books $252 billion stunner — places a bright red line under the “big” in Big Tech.

Since March 23, 2020, the depths of the pandemic-induced market meltdown, five tech stocks — Microsoft Corp., Alphabet Inc., Apple Inc., Amazon.com Inc. and Meta — collectively have accounted for 27% of the S&P 500’s gain. Going back five years, that percentage is 36%.

That was then. On Thursday, Meta’s unprecedented 26% plunge single-handedly wiped out almost 200 points off the Nasdaq 100, or about a third of the benchmark index’s 4.2% loss.

To be sure, not all tech names are taking a beating. Amazon shares surged about 18% in after-hours trading on Thursday after reporting profits that topped analyst estimates.  

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Low-cost index funds and ETFs are great during bullish times. But financial advisers warn that some people can get lulled into a false sense of security and fail to realize just how exposed they’ve become to a small number of big stocks.

“To the extent that retail investors own it outright or through passive indices, the pain to their portfolios is going to be felt quite a bit more than for those institutional investors, or those investors who have appropriately underweighted — or not owned — that company in their portfolios,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. 

Meta stunned just about everyone late Wednesday with news that Facebook had lost subscribers for the first time in its history. Until now, many investors, small-timers in particular, had come to view Meta as one of the bluest of blue chips — a company with seemingly unlimited potential.

Tobi Alli in Maryland was one of those traders watching the drop in horror. He first bought Facebook in late 2019 and has been adding to his position since then. 

“I sort of considered Facebook a safer stock that wouldn’t have this,” the 34-year-old said. “You expect these drop offs with meme stocks, but you don’t really expect a 25% pullback from Facebook.”

Now, after seeing more than $1,000 wiped from his portfolio, he’s asking himself some tough questions about his conviction in Meta.

Faang Exposure

Others were simply along for the ride because funds they invest in — both the actively managed and passive variety — have become so concentrated in Big Tech.

“So much market cap got tied to big tech names because the S&P and most other indices are market-cap weighted,” said Max Gokhman, chief investment officer at AlphaTrAI. “Folks that hold their 401(k)s and invest in the default options do have tremendous exposure to tech and the Faang stocks specifically.”

Many of the most popular funds in 401(k) retirement savings plans hold large slugs of mega-cap tech, and have steadily become far more concentrated in a handful of the stocks. For instance, Fidelity Contrafund — which is among the top 10 most popular funds in retirement savings plans — had 45.9% in its top 10 holdings as of December 2020. That percentage rose to 48.5% by November of 2021 and to 49.1% by the end of 2021.

As of Nov. 31, Meta was Contrafund’s largest holding, at 9.3%. When Amazon, Microsoft, Apple and Alphabet were added in, the five stocks made up more than a third of the fund, at 33.6%. 

Facebook had already taken a bite out of returns at that point. At yearend 2021, Contrafund’s quarterly commentary for investors noted that “by far, the fund’s biggest individual detractor was Meta Platforms (formerly Facebook), which returned -1% the past three months.” The fund was still a fan of the stock then, noting that as of Dec. 31, it was the fund’s largest overweight “as we like the company’s ability to generate very healthy operating margins and free cash flow.” 

Retirement Favorite

Another retirement plan favorite, the T. Rowe Price Blue Chip Growth Fund, has made bigger and bigger bets on mega-cap tech. Its top 10 holdings made up 57.5% of the fund as of  Dec. 31, up from 49.2% as of Jan. 31, 2020. As of year-end 2021, five mega-caps made up more than 45% of the fund, up from their 34.7% weight in Jan. 31, 2020 — Microsoft (11.1%), Alphabet (10.2%), Amazon (9.8%), Apple (7.8%) and Meta (6.6%).

Carl Marcel, a 28-year-old business owner in Seattle, is facing pain in both his holdings of Meta stock and his index-tracking funds. He has about 70% of his portfolio in stocks, 24% in ETFs tracking indexes like the S&P and Nasdaq and the rest in crypto. He estimates that he lost between $20,000 and $30,000 due to the Meta drop.

“I wasn’t expecting that at all,” Marcel said. “In the last earnings report everything sounded positive. Usually they never disappoint us so the market is rethinking how to approach it.” 

But he said he’s still optimistic about the company in the long term and plans to buy more shares, while also trying to diversify. 

To reduce risk, Gokhman at AlphaTrAI suggests that investors look beyond tech-concentrated indexes when allocating their money. More international stocks or those in the value sector — which are inexpensive relative to earnings — can help diversify away from a tech concentration. 

“The worst thing an investor can do is react on an emotion driven by a big move because the move had already happened,” he said. “Meta isn’t going away anytime soon. But then really take a look at your asset allocation.” 

To contact the authors of this story:
Claire Ballentine in New York at [email protected]
Suzanne Woolley in New York at [email protected]