over 3 years ago • 2 mins
With just five stocks accounting for the largest proportion of the US S&P 500 in decades, some fear that a few unpleasant earnings surprises could undo the market’s recent rally… 🕴
Tuesday should have been a decent day for US stocks, with over 200 of the country’s biggest posting more than 1% gains. But five of them – Apple, Microsoft, Alphabet, * Facebook* and Amazon – fell. And since those firms alone now account for about 24% of the value of the entire S&P 500, that was enough to wipe out almost all the others’ good work.
The top stocks’ growing dominance – higher even than during the dotcom bubble – has underpinned the US market’s recovery in 2020. Apple and Microsoft, accounting for 11% of the S&P 500, have helped the index’s “Information Technology” sector rise 15%, with investor attraction to large and fast-growing online revenues also pushing Amazon’s stock up 70%.
But the flipside is that bad news for tech means ever-worse news for the market overall. With most major tech earnings approaching next week, one or two disappointments could drag the entire S&P 500 down; and if greater regulation ever became a reality, things could get really rocky… 🌋
A key concern is concentration risk. S&P 500 investors are increasingly exposed to big tech, even though many “passive” punters buying in via exchange-traded funds (ETFs) will assume that they’re getting decent diversification. And as passive investment grows, so too does the value of America’s largest companies.
It could be worse. Along with eclectic electrician Tesla – not part of the S&P 500 just yet – the five aforementioned tech giants together represent 49% of even the tech-heavy Nasdaq 100 index, which is up 24% this year. The Russell 2000, meanwhile – an index of smaller stocks that arguably better represents the true state of the US economy – remains down 10% in 2020.
Given that the top tech stocks are responsible for 14% (and counting) of S&P 500 companies’ combined profits, some investors think concentration concerns are overblown. But for those looking to back forward-thinking companies without putting a quarter of their eggs in just five baskets, outperforming options like the SPDR S&P Kensho New Economies Composite Index ETF may offer a bit more balance… ⚖️
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