Mega-Cap Tech Stock Splits Fail to Boost Market Sentiment

The price of Alphabet (GOOGL) is set to trade in the $100 range today after the company completed a 20-for-1 stock split.  Alphabet joins Amazon.com (AMZN), Spotify Technology (SPOT), and other high-priced technology stocks in splitting their shares to make their stock prices more accessible to retail investors and traders.  However, the lower price tags of the stocks have done little to lift prices amid broader concerns about Fed rate hikes and cooling economic growth. 

Amazon.com is down -9% since completing its stock split last month.  Shopify, whose stock price has plunged more than 70% this year, has failed to catch a bid and is down more than -5% since its 10-for-1 stock split took effect June 29.  The weak performance of the stocks is a reversal of fortune from 2020 when Apple (AAPL) and Tesla (TSLA) shares soared to record highs in the months after their stock splits.

The impact of stock splits is partially just cosmetic.  The splits do nothing more than redistribute a company’s equity over a larger number of shares.  Some investors, though, take a stock split as a bullish sign that a company is optimistic about the outlook for its business, and a split announcement often triggers at least a brief jump in the stock’s price.  The stock split may also bring in smaller investors who think they cannot afford the high stock price.

There are other benefits that stock splits can bring, such as opening the door for mega-cap stocks like Alphabet and Amazon.com to gain entry to the Dow Jones Industrial Average ($DOWI) (DIA), whose weighting is based on stock price rather than market value.  Managers of the Dow Jones Industrial Average cannot allow high-priced stocks to enter the index because those stocks would have an inordinately large weight in the index. Alphabet and Amazon.com still hold outsized sway over the market-cap weighted S&P 500 Index ($SPX) (SPY) due to their trillion-dollar market caps.

With the Q2 corporate earnings season currently underway, the market is focused on whether the mega-cap technology stocks can live up to lofty profit expectations that many see as overly optimistic. For example, estimates for Alphabet’s earnings this year have fallen just -0.8% over the past month despite a warning from Snap Inc. (SNAP) about macroeconomic headwinds hurting its ad business.  Also, mega-cap international companies must contend with a soaring U.S. dollar after Microsoft (MSFT) recently reduced its earnings forecast due to the strong dollar, which reduces the value of overseas earnings.

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