As the race to become the first company worth $1 trillion enters the final lap, technology monopolies are dominating the stock market. The five biggest companies by market value are U.S. tech stocks: Apple , Amazon, Alphabet , Microsoft and Facebook . Between them they accounted for more than a third of the $2.7 trillion increase in value of the S&P 500 in the past 12 months.
Worse, the top five now make up more than 15% of the S&P, the most for any top five since early 2000. Is it time to worry that the market is getting top heavy?
History suggests not, as a handful of companies have been far more dominating in the past. But that doesn’t mean we should be unconcerned. The first risk to investors is that they turn out to be wrong to think that disruptive tech companies will be immensely profitable in the future. The second risk is that the outperformance of a small group of huge companies is a sign that the market is approaching the end of the cycle, as it was ahead of the 1990, 2000 and 2008 recessions, as well as in 1973.
Start with the good news. Apple, with a market value of $937 billion, is about 4% of the S&P on its own, the most of any company since Exxon Mobil in 2008, and before that Microsoft in the dotcom bubble. But go back further and the S&P looks much better distributed: At the start of the 1970s IBM was 9% of the index, while AT&T and General Motors both had a bigger share than Apple has today. (You can play with the chart below to see the biggest companies in any year.)
Not So Remarkable After All
Total market capitalization of five-largest S&P 500 companies by market capitalization at the end of each year
Tap the chart to update the top five
Notes: If a company has changed its name, its most recent name is shown, but in the case of mergers, premerger and postmerger names are shown. Royal Dutch Petroleum is based in the Netherlands. Alphabet percentages are for both S&P share classes.
Source: S&P Dow Jones Indices
The same goes for the top five, which had a higher share of the S&P than they have today from 1964 until 1983, according to calculations by Tim Edwards of the index investment strategy team at S&P Dow Jones Indices. However, there used to be a longer tail of small companies, and the S&P now makes up a much larger proportion of the total value of the market.
What’s different is that this time all five share a single characteristic, that of being disruptive tech stocks with strong grips on their customers. Shareholders have bought into the idea that these companies will dominate the market for many years to come, reaping the rewards of their heavy spending on research and development and expansion into new areas of business. In the past the most similarity was in 1980, when three stocks were oil dependent: industry supplier Schlumberger , Exxon and Amoco’s predecessor. Even in the dotcom madness at the end of 1999, Exxon, retailer Walmart and industrial conglomerate General Electric remained among the five biggest.
Such concentration by type of company should be troubling. It requires the belief that something deep has changed in the nature of business, and the big tech companies have better defenses for their profits than big companies had in the past. Or that they are able to exploit technologies in ways that other companies aren’t, and that governments won’t step in, as in the past, to restrict such highly profitable monopolies. Or perhaps that visionary leaders and innovative corporate cultures mean the companies are destined to beat more conventional competitors in the future, too. But a lot of money is riding on the idea that the big five’s fat profit margins or rapid growth are impervious to competition, even from one another.
It is also unusual that a small group of large companies should do so much better than everyone else. The scale of the outperformance is extraordinary: An investor who put the same money into each of the big five a year ago is up 38%, ignoring dividends, while the S&P is up 14%.
The simplest measure of large-stock performance within the S&P is to compare the ordinary index weighted by market value, where the biggest have a much bigger effect on market moves, against an equal-weighted version. Usually the equal-weight S&P does better, as smaller members of the index outperform the dullards at the top. But as the business cycle and market cycle grow old, it is common for investors to concentrate on a smaller number of big stocks, leading the equal-weight index to underperform. That’s what happened ahead of the 1990 downturn, the popping of the dotcom bubble in 2000 and the 2008 crash after Lehman failed. It’s happening again now.
But this time might be different. While the tech giants are beating the rest of the S&P, smaller stocks are beating the S&P, too, so it may be more about tech excitement than a rotation into big companies. Equally, the tech giants are no mere dotcom flash. But it is rare for the biggest stocks to outperform for long.