By Caroline Valetkevitch, Rodrigo Campos and Patturaja Murugaboopathy
(Reuters) - Soaring shares of Apple Inc (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL) Inc and Tencent Holdings Ltd this year have made technology a top global performer, with few signs that investors are worried that rising valuations might be increasing the risk of a downturn.
The technology rally's international scale expanded last week, when social network Tencent became the first Chinese firm to be worth over $500 billion, briefly surpassing Facebook Inc (NASDAQ:FB). Tencent's stock has surged 121 percent in 2017 and is up 20 percent in the past month.
Chinese Internet seller Alibaba (NYSE:BABA) Group Holding Ltd is close behind, with a market capitalization of $481 billion, more than double from the start of the year.
The S&P 500 information technology index has gained 39 percent in 2017, with the sector now accounting for a quarter of the overall S&P 500's $24 trillion value, the highest proportion since the dot-com bubble in 2000. (http://tmsnrt.rs/2ADC9B1) (http://tmsnrt.rs/2AcePtq)
Hong Kong's Hang Seng technology index is up 99 percent this year, trading at 43 times past earnings.
Nearly nine years into a bull market, investors are fawning over technology stocks to a degree they have not in over a decade, and they are willing to pay up for the privilege of owning them. This year, they have poured $12.6 billion into U.S. technology mutual funds and ETFs, the most since 2000 at the end of the dot-com boom, according to Thomson Reuters Lipper.
With subdued economic growth around the globe, including the United States, investors feel confident latching onto a sector that has persistently delivered above-average growth.
"Technology applies to all lines of businesses, whether it's Amazon (NASDAQ:AMZN) to grocery stores or warehouses run by robots," said Bucky Hellwig, senior vice president at BB&T (NYSE:BBT) in Birmingham, Alabama. "Technology is something investors feel really comfortable with."
Asia's five largest tech companies, including Tencent and Alibaba, grew their sales by 20 percent year-over-year in the first half of 2017, outperforming the 13-percent sales growth of the five largest U.S. tech companies, according to Thomson Reuters data. (http://tmsnrt.rs/2Acpggf)
Tencent, Alibaba, Samsung Electronics (KS:005930) Co Ltd and Taiwan Semiconductor Manufacturing Co Ltd now account for four of the world's 10 largest tech companies by market value. (http://reut.rs/2Adplk4)
Silicon Valley heavyweights and other tech companies have consistently been a leading driver of S&P 500 earnings growth in recent years, a trend expected by analysts on average to continue through the second half of 2018.
S&P 500 tech earnings grew 24 percent in the third quarter of 2017, the highest since the first quarter of 2011, Thomson Reuters data shows. Third-quarter earnings for all S&P 500 companies rose 8.3 percent from a year ago, but without tech, that growth rate was just 4.4 percent. (http://reut.rs/2ACW4jC)
"I'm not too worried about the (tech) valuations as there's a growth paradox: 96 percent of the world's GDP is growing, but only 40 percent of it is above-average growth," said Brian Jacobsen, a multi-asset strategist at Wells Fargo (NYSE:WFC) Asset Management. "In the near-term, high valuations for high growth companies can persist."
Soaring stock prices have left the S&P 500 IT index trading at nearly 19 times expected earnings, versus the S&P 500's P/E multiple of about 18, according to Thomson Reuters Datastream. (http://reut.rs/2ACFW1k)
Investors run the risk of becoming convinced that technology companies' hyper-growth and surging stock prices could become permanent, forgetting lessons learned following past booms and busts, like the dot-com bubble and the 2007-2009 financial crisis, Richard Bernstein Advisors Chief Executive Richard Bernstein wrote in a recent research note.
During the dot-com boom in 2000, Wall Street paid as much as 48 times expected earnings to own the S&P 500 IT index.
"Investors seem primed to get burned yet again in technology shares, but it is still probably too early to worry," Bernstein wrote.