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Five Big Tech Stocks Build Market Euphoria, and Jitters

Facebook. Amazon. Apple. Netflix. Google.

Not only do they dominate our daily lives, but as their stocks continue to soar, these technology giants may also dictate our financial futures.

In the last three years, their share prices have risen far faster than the major market indexes — Amazon leads the way, up 206 percent; Apple trails the pack with a 67 percent gain — as investors of virtually every stripe have piled into these companies.

But this gold-rush mentality, reminiscent of investor frenzies for Nifty 50 stocks in the late 1970s and the dot-com boom and bust at the end of the last century, is giving investors pause. Not because they think these companies will crack, as many did in previous market corrections, but because in the parlance of the industry, the trade has become very crowded.

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"There is valuation anxiety out there, that is for sure," said Ed Yardeni, an independent investment strategist who often highlights the influence of these stocks in his research notes. "No one is feeling totally comfortable holding stocks that are this expensive."

Despite some nervousness that a bubble might be building, stock indexes remain near recent record highs, without adjustment for inflation. On Wednesday, stocks ended slightly higher in cautious trading on the eve of several potentially market-moving events on Thursday, including the British election and testimony from James B. Comey, the former F.B.I. director.

The Standard & Poor's 500-stock index closed up 0.16 percent on Wednesday, led by gains in bank stocks.

Other markets have been robust recently, including those for gold, a traditional haven, and the virtual currency Bitcoin. But oil prices and the United States dollar have weakened, with the Bloomberg dollar spot index at its lowest levels since the Nov. 8 election.

The stock market, however, remains the main attraction.

Late in any bull market, investing in highflying momentum stocks requires balancing greed and fear. Everyone wants to keep making money, but everyone also lives in fear that the party will suddenly end.

According to the data provider FactSet, since 2012, mutual fund, pension fund and hedge fund holdings of stock in the five technology giants have more than doubled, to $1.4 trillion, from $558 billion — a consequence of investors' buying up stocks that are rapidly increasing in value.

As is its wont, Wall Street has given voice to this unease with a nickname: Faang, an acronym for the five stocks that evokes a gruesome end more than it does the exuberance of the moment.

The push into these stocks has been driven by retail investors via traditional mutual funds, exchange-traded funds and direct ownership.

Through these channels, retail investors now own 60 to 70 percent of these stocks — an exposure of very large amounts of money to a small selection of stocks that investment specialists say is unprecedented.

It is also dangerous because a prolonged bout of selling in such a small number of stocks could spur a wider sell-off in the market.

"In terms of magnitude, we have not seen this," said Jim Paulsen, an independent stock market strategist.

In Mr. Paulsen's view, a long period of subpar economic growth since 2009 has given the Faang stocks their special aura. Most companies have struggled to show consistent earnings and sales growth over this period.

So when Facebook's net earnings leap to $10 billion, from $1.4 billion, in four years or Amazon's sales jump to $135 billion, from $74 billion, investors take notice.

"You have this small cadre of companies that are showing extraordinary growth in a very sluggish economy," Mr. Paulsen said. "So yes, you can see how valuations would get extended."

Stock market historians say it would be unfair to compare today's technology companies to the more speculative names that characterized the dot-com boom and bust. Progress can easily be measured via earnings and the cash-generating abilities these companies have, as opposed to counting eyeballs on the web, which was the norm in that era.

Still, the question remains: How much more can the stock market valuations of these companies grow relative to the earnings they produce?

For example, the current stock market size of the Faang companies is $2.4 trillion, or about 13 percent of the size of the United States economy. By comparison, their combined earnings were just $77 billion last year — with more than half that amount from Apple, the world's richest company.

Of course, in many cases, investors are calculating that in the long term, earnings growth will catch up with sales expansion as well as heavy investment spending aimed at putting competitors out of business.

Amazon, whose $2.3 billion in earnings last year supports a market capitalization of $483 billion, is the most profound example in this regard.

Still, it is not today's earnings that investors are betting on, but tomorrow's, the argument goes.

Surprisingly, some of the most passionate advocates for these companies are value investors. These investment professionals have earned reputations for snapping up companies trading at deep discounts relative to the market, not chasing stocks that fly high above it.

Bill Nygren, a value investor for more than 30 years, oversees the $5.8 billion Oakmark Select Fund, and his No. 1 holding in the fund is now Google's parent, Alphabet.

Mr. Nygren contends that the company is trading at a bargain to the market, as opposed to a premium, if Google's cash pile and the potential of YouTube to make a lot of money in the future are considered.

"I have not heard anyone advance the argument that the Google search engine is not even an average business," Mr. Nygren said. "Yet that is how the market is pricing it."

Another well-known value manager who is betting big on Faang stocks is Chris Davis, the lead stock picker for the $11.8 billion New York Venture Fund, where Amazon is his top position.

While skeptics see just $2 billion in earnings, he and his analysts see a company that has generated more than $15 billion in cash and is ready for a higher market rating because of the profitability of its web services division.

"Amazon is more fully valued than when we bought it," Mr. Davis said. "But we have never seen a company with such competitive advantages."

As these stock prices continue to rise, analysts agree that investors have little choice but to stick to their guns.

That is because the Faang stocks have become such large components of the major stock market measures. For a manager not to match the share of an Apple or an Amazon in a benchmark would result in an actively managed fund trailing its index and its peers.

And as investors pour billions of dollars into exchange-traded funds — a record $314 billion in the last year — no active manager can afford to lag the competition for too long.

So be it a mutual fund, hedge fund, sovereign wealth fund or family office, the strategy has been consistent — put aside any fears, and stay invested.

"It's like you are riding a missile that you know could explode at any moment beneath you," said Julian Brigden of Macro Intelligence 2 Partners, an independent research company based in Vail, Colo. He has warned in his reports that some of these stocks have entered a stage of mania. "But," he said, "you have no choice but to be sucked into the trade."