Apple Stock and Big Tech Are Winners. Why Cathie Wood’s ARK Is Still a Loser. – Barron’s

Big Tech is almost single-handedly responsible for the markets rally this year. Yet the band of winners is so narrow plenty of tech plays have also been left in the dust.

We can question how far those rallies can go, but its clear that Big Tech is benefiting from relative immunity to the banking worries that have shaken investors lately. Investors have also appreciated tech companies beating lowered earnings expectations.

Big rallies like those enjoyed by companies like Microsoft post-results stand out at a time when, on average, companies reporting top- and bottom-line beats are outperforming the market by just 0.1% this quarter, well below the 1.7% average historical outperformance, according to Credit Suisse.

Unfortunately, unlike a rising tide lifting all boats, Big Techs surge has largely been self-contained. Using Cathie Woods ARK Innovation exchange-traded fund (ARKK) as a proxy for the more-speculative basket of tech stocks, DataTrek co-founder Jessica Rabe notes that it continues to underperform the Nasdaqs dot-com bubble meltdown during the early 2000s.

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As Rabe writes, today makes 558 days since ARKKs all-time high in February 2021, and since then the fund has slumped 78%, roughly mirroring the Nasdaq Composite indexs peak-to-trough tumble just over two decades ago: In the 2000-2002 time frame, the index tumbled 69% from its March 2000 high water mark.

However painful that decline, it didnt mark the end. After day 558 of the Nasdaqs dot-com implosion, it still fell another 29%. In the end, it would be nearly two and a half years before the Nasdaq found a bottom, in October 2002.

Likewise, Rabe highlights that ARKKs early year-to-date gains have been largely erased, hinting that more pain could come. The ETF raced ahead of the broader market in January, but is down 22% since early February; that temporary reprieve is attributable to the January Effect as tax-loss selling abated after many of its holdings got crushed in 2022, she writes.

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Therefore, she notes that even though ARKK has already suffered the same decline as the Nasdaq did during its 2000-2002 bear market, if it also ultimately matches its time frame, the fund could keep struggling through early September, given the dot-com busts long, slow deflation. In addition, ARKKs highly concentrated portfoliowith just 28 holdingsmeans its dependent on more-speculative tech names to replicate the success in Big Tech; that stands in contrast to the Nasdaqs diversified set of components.

If nothing else, the Nasdaqs experience shows ARKK needs a catalyst to find a bottom, such as more certainty about the macroeconomic environment, Rabe concludes, particularly as the market has gravitated more toward less risky tech bets. Whether or not Block (SQ) and Teladoc Health (TDOC)two of ARKKs top-10 holdingssucceed over the next decade is a much-more-difficult call than Microsoft or Apple in the early 2000s.

Write to Teresa Rivas at teresa.rivas@barrons.com

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Apple Stock and Big Tech Are Winners. Why Cathie Wood's ARK Is Still a Loser. - Barron's