Today’s surge in AAPL stock, when news of more purchases by Warren Buffett in the first quarter unleashed a buying frenzy, sending the stock to a new all time high, had a secondary effect of accelerating the entire FAANG sector (Facebook, Apple, Amazon, Netflix and Google), which now makes up a bigger piece of the tech pie than ever before.

As the chart below show, FAANGs now accounts for over 27% of the Nasdaq Composite, a new all time high, doubling in the past 5 years. 

It also triggered a warning from none other than Goldman Sachs which looked at a similar ratio, that of the Info Tech sector as a $ of the S&P, and conclude that “Large exposure = large risk”.

First, some background on the stunning impact of tech stocks on the overall market:

Over the last five years, fast sales growth and high profit margins have driven the Technology sector to contribute 73% of S&P 500 margin expansion and one-third of EPS growth. The strong fundamentals have led to remarkable outperformance: Since the start of 2017 the Tech sector has contributed 43% of the total S&P 500 return, with the “FANG” stocks alone accounting for 12% of the market return.

That’s the good news. Now the not so good.

First, unprecedented concentration: the Tech sector’s widespread popularity raises the risk facing portfolio managers. At the start of 2018 Tech stocks accounted for 26% of large-cap mutual fund portfolios, equating to a 235bp overweight relative to benchmarks, the largest among sectors. Hedge fund filings show a similar preference among levered investors, with 24% net exposure to Technology. Passive investors are also exposed to the risk of a downturn given the Tech sector’s large market weight, at 25% of S&P 500 market cap.

Second, the historical record: During the last 50 years, only the Energy sector in the early 1980s (26% weight), Tech in the late 1990s (35%), and the Financials sector in the mid-2000s (22%) have similarly exceeded 20% of S&P 500 index weight.