The S&P 500 returns in 2017 have been primarily driven by five technology stocks: Facebook, Apple, Amazon, Microsoft, and Google/Alphabet (FAAMG). Together these stocks contributed 30% of the S&P 500 performance. While some see this as a tech bubble, analysts argue valuations are reasonable given growth rates and cash flows. These companies are also changing the economy through cloud computing, e-commerce, advertising, and media consumption. Going forward, technology is likely to continue driving innovation and benefiting from increasing digitalization.

1. Market Perspective – June 2017
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Overview: This month we dive deeper into equity market performance and discuss the narrow
leadership that has re-emerged. There is always a concern when market gains are led by a
limited number of stocks. However, the current members of leadership driving these market
gains are dynamically changing the way our economy functions. This is all happening via
seemingly sustainable competitive advantages and compelling cash flows, valuation concerns
notwithstanding.

2. S&P Returns for 2017 Primarily Driven by Five “Technology” Stocks
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Year-to-date (YTD), mega-cap technology companies are amongst the largest contributors
to domestic returns. Facebook, Apple, Amazon (classified as consumer discretionary),
Microsoft, and Google/Alphabet (together called FAAMG) performed between +14% and
+33% in 2017. Together, these five companies contributed 30% of the S&P 500 Index
performance YTD.
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Source: Bloomberg

3. Tech Bubble? Not Likely
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While these stocks have had uncharacteristically low volatility
and their valuation multiples have expanded, we do not believe
they are contributing to a bubble in technology similar to the
tech bubble in the early part of the century.
• Current valuations (P/E) are reasonable considering the quality
of the franchises and current and expected growth rates.
• Cash balances are high and free cash flow generation is
healthy, whereas during the prior bubble many companies
were unprofitable.
• FAAMG stocks have a large and growing addressable market to
spend capital.
• Technology spending can be characterized as “smart”
spending. Return on assets and invested capital are much
larger than some other sectors of the economy.
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Source: Goldman Sachs

4. Changing the Economy
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These market leaders are changing the economy in a multitude of ways. Multi-trillion dollar opportunities exist to
change behavior and to benefit the bottom-line profitability long-term. Below are a few examples:
• Cloud - companies such as Amazon and Microsoft are centralizing infrastructure for computing technology.
• Retail - Amazon is helping to change the habits of consumers around the globe.
• Advertising - Google and Facebook are changing the way advertising is seen with analytical metrics of
effectiveness.
• Media Consumption - Apple, Amazon, Google and Facebook have and continue to disrupt traditional media
consumption.
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Source: Smart Insights
Source: RapidScale Source: Deloitte

5. Example: Advertising, Secular Opportunities Abound
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Advertising continues to move online at a rapid pace. According to
PwC, Facebook and Google are predicted to make $106 billion from
advertising in 2017, almost half of the world's digital ad spending.

6. Example: Retail Disruption
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Despite the notion that e-commerce dominates retail sales, e-commerce is currently less than
9% of total retail sales with a meaningful future runway for growth. Amazon accounts for 43% of
U.S. online retail sales. With the recent announcement of Amazon acquiring Whole Foods, the
expansion into additional areas of retail will surely be felt by traditional brick and mortar stores.
Source: U.S. Census Bureau

7. Conclusion: A large portion of YTD market returns are from a handful of technology-oriented
stocks. While markets will see periodic changes in sector leadership, it is likely that the
technology sector will continue as an innovation driver and will benefit from the secular tailwind
of ever-increasing digitalization. As investors, we continue to seek opportunities to participate in
these secular trends that will enhance future returns, while keeping a close watch on the
associated risk metrics.
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Market Perspective – June 2017
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Disclaimer
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Opinions expressed in this commentary may change as conditions warrant and is for informational
purposes only. Information contained herein is not intended to be personal investment advice for
any specific person for any particular purpose. We utilize information sources that we believe to
be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee
of future performance; investing involves risk and may result in loss of capital. Consider seeking
advice from a professional before implementing any investing strategy.