When is the best time to get out of mega cap stocks? Asking for a friend.

By David Nelson, CFA CMT
Did anything change last week? Not really. It was a modestly downbeat week with the exception of Friday’s monster rally on the heels of a solid quarter from Apple (AAPL). The stock sits just shy of the August 2022 high and only modestly below all-time highs set in 2021.

Bloomberg Data 

There was nothing spectacular about the quarter and certainly revenue challenged as the top line this year will end below last year’s $394 Billion.

BuffettBuffet probably said it best at his Woodstock for Capitalists get together or Berkshire’s annual meeting. Many would be more comfortable parting with a $35,000 second car than their $1500 iPhone and likely explains why he owns better than 5% of the company.
With $2.7 Trillion in investor capital supporting the market cap it’s hard to argue with the Oracle of Omaha.
While the good news from Apple and perhaps a solid job’s report coming in at 253k we’re enough to hold off recession fears, a lot of the challenges we’ve faced in the last couple of months are still with us.
Banks don’t go down 70% without systemic issues playing a role. There’s little the Fed can do to support the banking system unless monetary and fiscal policy start to work together.

Berkshire Ownership of Apple

Bloomberg Data

As I’ve said in previous articles the Fed has already broken a few banks and if they press further without a solution, will likely break something bigger.

Americans have enough on their plate without having to worry about their cash and that includes the fortunate who may have more than the $250k FDIC limit. Corporations and even smaller companies have payrolls to make.

There are a lot of solutions on the table including a higher FDIC limit and maybe one of the more original, requiring those who have deposits above the FDIC limit pay for additional insurance.


Investors are generally not a patient breed but the overriding challenge for the broad market is the following:

Bloomberg Data

Stocks don’t live in a vacuum and most valuation models start with the risk-free rate which is now the highest since 2007. The current earnings yield at just over 5% doesn’t have a competitive advantage over a current fed funds rate of 5%.

Time heals all wounds

Maybe it doesn’t heal all, but equity markets can grow into their valuation as an economy improves.

And therein lies the bullish case. Stocks are a forward-looking mechanism and apparently see something that isn’t showing up in current earnings reports.

S&P 500 Earnings Growth Next 2 Years

Bloomberg Data

Markets are pricing in a Fed that will be cutting rates in a few months and estimate revisions point to 9% growth next year. 

Interest Rate Probability

Bloomberg Data

We’re likely going to need both to drive markets much further from here.

Mega Cap Comfort

In the meantime, investors have been comfortable piling much of their funds into mega cap secular growth companies like Apple, Microsoft and others. This is clearly a defensive move. I’m repeating myself but it’s an important point to make.

When Rates Rise

Bloomberg Data

When rates rise the balance sheet matters. Equity investors often don’t even look at the debt load during bull market cycles. Even the most challenged companies can get access to credit or issue debt at a reasonable rate.

When interest rates rise, suddenly it gets real. Most industries have working capital needs and need lines of credit. JPMorgan can’t take care of everyone and with the regional banking system cracking now trading near the lowest levels since the Covid bottom, CFOs at many businesses are scrambling to access lines of credit. Even if they have access, at a minimum it will be more expensive.

Regional Banks

Bloomberg Data

The above has been a large part of the catalyst to jam as much into the mega cap trade as possible. Apple and Microsoft are sitting on piles of cash with little need for banks. Both can self fund their working capital an advantage much of corporate America doesn’t have. 

When will be the time to get out of mega cap stocks?

I’m not sure that’s the right way to put it. Perhaps a better statement would be when is the best time to reduce your exposure to mega caps?

When stocks can smell an increase in economic activity money will start to move out of these investor favorites and move down the market cap scale to more cyclical companies buying growth at a cheaper price. No, they won’t dump it all, but they will have to sell some to divert to new purchases.

The Debt Ceiling

Bloomberg Data

On the heels of Secretary of Treasury Yellen warning that the country could run out of funds as early as June, House Speaker McCarthy and Senate Minority leader McConnell have accepted an invitation from President Biden to jump start talks. Both sides are dug in, but it would appear Republicans have gained a little leverage with the passing of a House Bill raising the debt limit with conditional spending cuts.

Ultimately the decision could be to kick the can down the road and deal with it later in the year but with U.S. debt now over $31 Trillion there isn’t a moment to lose.

*At the time of this article some funds managed by David were long AAPL, MSFT & BRK/B