If you are an investor who has been enjoying the stellar performance of mega-cap tech stocks like Apple, Tesla and Alphabet, you might be feeling a bit nervous lately. These giants have been driving the market higher for months, but they have also been facing some headwinds that could threaten their dominance.
In this blog post, I will share some tips on how to manage a stock market drop as mega-cap tech gains dominate, and what to look out for in the coming weeks.
Why are mega-cap tech stocks under pressure?
There are several factors that are weighing on the mega-cap tech stocks, but the most prominent one is their exposure to China. China is a huge market for these companies, especially for Apple and Tesla, but it is also a source of uncertainty and risk.
According to research firm Counterpoint, iPhone sales plunged 24% in China in the first six weeks of the year, while competitor Huawei saw its popularity rise in the country. Tesla also saw its vehicle sales in China drop by 19% year-over-year in February, its lowest month of sales in the country since December 2022.
The reasons for these declines are not clear, but they could be related to the weakening Chinese economy, the trade war with the US, the coronavirus outbreak, or the rising nationalism and consumer preference for local brands. Whatever the case, these numbers are not encouraging for investors who are betting on China as a growth engine for these companies.
Another factor that is hurting the mega-cap tech stocks is the competition in the AI space. Alphabet, which owns Google, has been a leader in AI research and development, but it has also faced some challenges recently. Its AI project Gemini, which was supposed to be a breakthrough in natural language understanding and generation, turned out to be a flop that disappointed users and investors alike.
Meanwhile, other players like Microsoft, Amazon and Facebook are not sitting idle. They are investing heavily in AI and cloud computing, and they are gaining ground on Alphabet in terms of market share and innovation. For example, Microsoft’s Azure AI platform has been gaining popularity among developers and enterprises, while Amazon’s Alexa has been expanding its capabilities and reach.
These developments suggest that Alphabet might be losing its edge in AI, which could have serious implications for its future growth and profitability.
How to manage a stock market drop as mega-cap tech gains dominate?
Given these challenges, it is not surprising that the mega-cap tech stocks have been dragging down the broader market lately. On Tuesday, March 5th, 2024, US stocks declined as Apple fell by about 3%, Tesla dropped by about 4%, and Alphabet slipped by about 1%. These declines contributed to the losses of the S&P 500 (-1.02%), the Dow Jones Industrial Average (-1.04%), and the Nasdaq Composite (-1.93%).
So how should you react if you are an investor who owns these stocks or who is exposed to them through index funds or ETFs? Here are some tips that might help you:
- Don’t panic. Stock market drops are normal and inevitable, especially after a long period of gains. The mega-cap tech stocks have been outperforming the market for a long time, so some correction is expected and healthy. Remember that these companies are still very profitable and innovative, and they have loyal customers and fans around the world. They are not going away anytime soon.
- Diversify your portfolio. While it is tempting to chase the winners and load up on the mega-cap tech stocks, it is also important to diversify your portfolio across different sectors, industries and geographies. This way, you can reduce your exposure to any single company or market risk, and you can benefit from other opportunities that might arise elsewhere. For example, you might want to consider adding some value stocks, emerging markets or commodities to your portfolio.
- Rebalance your portfolio. If you have been holding the mega-cap tech stocks for a long time, they might have grown to become a large part of your portfolio. This means that you might be taking more risk than you intended or needed. To avoid this situation, you should rebalance your portfolio periodically by selling some of your winners and buying some of your losers. This way, you can lock in some profits, reduce your risk level and maintain your target asset allocation.
- Review your goals and risk tolerance. A stock market drop can also be a good opportunity to review your investment goals and risk tolerance. Are you investing for the long term or the short term? Are you saving for retirement or for a specific goal? How much risk can you afford to take and how much volatility can you handle? These questions can help you determine whether you need to adjust your portfolio or stick to your plan.
- Seek professional advice. If you are not sure how to manage a stock market drop as mega-cap tech gains dominate, or if you need more guidance and support, you might want to seek professional advice from a financial planner or advisor. They can help you assess your situation, review your portfolio, and make recommendations that suit your needs and preferences.
The mega-cap tech stocks have been the stars of the stock market for a long time, but they have also been facing some headwinds lately. Their exposure to China, their competition in AI, and their high valuations are some of the factors that are putting pressure on them and the broader market.
As an investor, you should not panic or overreact to these challenges, but you should also not ignore them. You should use this opportunity to diversify, rebalance, review and seek advice for your portfolio, and prepare yourself for the next market move.