Five Biggest Stocks Are 23% of S&P 500 Market Cap

https://thesoundingline.com/chart-top-five-stocks-hit-23-of-sp-500-market-cap/

49 76 6 years ago

tsjq• 6 years ago

Due to the trillions of dollars blindly going into index funds, thereby purchasing these stocks, are these five companies' stock prices way too artificially high ?

1over137• 6 years ago

"blindly"? People choose index funds very deliberately, because mutual funds are so much more expensive.

dralley• 6 years ago

"Blindly" meaning that your average index fund investor has absolutely no idea what's in their portfolio. They are blind investors.

lotsofpulp6• 6 years ago

I think you mean passively managed mutual fund vs actively managed mutual fund. You can have a passively managed mutual fund that follows an index with extremely low expense ratios like FXAIX or FSKAX.

https://money.usnews.com/investing/investing-101/articles/et...

lotsofpulp6• 6 years ago

Depends if you have a better alternative that you think will have better growth in profit.

gruez• 6 years ago

But since most index funds are market cap weighted, wouldn't the other 495 companies (assuming s&p 500 index, if you buy a all-cap index it might be 2000+ companies) go up the same % as well?

unreal372• 6 years ago

It may be "high" but it's not "artificial".

That's real money being invested in these companies. Index funds buy stock and never sell it. It's real money, buying real shares, that takes the stock out of circulation, that don't get day traded.

Anyway, not to be caught in semantics, but I believe stocks can be priced high and very high, but that doesn't mean it has to fall. The index fund system props up the prices forever.

bryanlarsen3• 6 years ago

The addition of Tesla in a few weeks will bring this metric down a little bit. Tesla will be a top ten stock but not a top five stock.

postingawayonhn• 6 years ago

It'll be number 6 (assuming you treat the two classes of Google shares as one company like the source has).

bluedevil2k4• 6 years ago

Try the ETF with the symbol "RSP". It's an S&P 500 fund, but each of the 500 is equally weighted. In other words 0.2% of the fund. The theory is that the larger companies in the S&P 500 have less growth potential, or are already overvalued, compared to the smaller companies.

refurb2• 6 years ago

How often does the fund get rebalanced?

That’s the nice thing with the market cap weighted SP500 funds, no tax consequences from rebalancing.

But you could plug “RSP” into a tax-advantaged account.

Edit: You can owe taxes even if you don’t personally buy/sell.

As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.

https://investor.vanguard.com/investing/taxes/mutual-funds-e...

jzwinck• 6 years ago

What personal tax consequences arise from rebalancing within an index fund?

JumpCrisscross2• 6 years ago

Try the ETF with the symbol "RSP". It's an S&P 500 fund, but each of the 500 is equally weighted.

Note that an equal-weighted index will tend be more volatile, have higher turnover (i.e. more trading costs and short-term tax effects) and be sensitive to value over momentum in comparison with a market-cap weighted index like the S&P 500. The former have outperformed the latter over the last decade (EDIT: no, it hasn’t. I was looking at a biased source.)

lotsofpulp6• 6 years ago

Have equal weighted indexes outperformed market cap weighted indexes in the last decade?

Morningstar shows VOO with a greater total return than RSP for past 5 years and since inception. I didn’t see past 10 years at a quick glance, but I imagine it’s the same.

htfy96• 6 years ago

My preference would be holding normal SPY and hedge the overweighted NASDAQ stocks with short NQ futures. In this way you only need to rebalance the NQ futures which benefits from 60/40 rule with better tax rate.

dgrin91• 6 years ago

To put the nail in the coffin, take a look at a comparison between the two: https://www.google.com/finance/quote/.INX:INDEXSP?sa=X&ved=2...

Historical performance of RSP has always lagged behind SPX

bluedevil2k4• 6 years ago

Note, it’s an ETF so there’s no tax consequences directly on the buyer until it’s sold.

Aunche• 6 years ago

That theory doesn't make much sense. For example, surely Amazon has a lot more room to grow than Coca Cola.

Cthulhu_3• 6 years ago

I'm not sure; Coca Cola could start investing money and start buying up other food & drink brands.

I mean could you have imagined 10, 20 years ago that Disney would start to gobble up other companies like some weird Shoggoth monstrosity and multiply its stock value by 5-6 times?

andy_threos_io2• 6 years ago

More interesting, that around 2000 the top 5 was Microsoft, GE, Cisco, Intel, Walmart. Nothing last forever.

Avalaxy• 6 years ago

Except for Microsoft :P

Cthulhu_3• 6 years ago

All of which are still massive companies, with Walmart pulling in half a trillion per year in revenue, double that of Apple or Amazon. Stock market value only tells part of the story (that of the richest getting richer).

throw0101a10• 6 years ago

Walmart has a well-understood business model, and so there is less uncertainly/risk, which means that investors generally accept lower returns for greater certainty.

The impact and revenues of tech companies is more uncertain, which is more risky, so investors are asking for more return in exchange for taking on that risk.

Recent video by Ben Felix of PWL Capital on the topic, "Investing in Technological Revolutions":

Exciting new technologies, and the companies that create them, seem like obvious investment opportunities. Why wouldn’t you want to invest in the companies leading a new world-changing technological paradigm?

* https://www.youtube.com/watch?v=UZnVt_CvL3k

Some of the past recent he's found has shown that investing in a company on the way to being a Top 10 gets you good returns, but once a company is in the Top 10 its returns actually lag the market average.

As for income/wealth disparity: redistribution was used to good effect post-WW2 with high marginal tax rates, and it's also why the idea of a 'baby bond' is gaining some traction.

thebean112• 6 years ago

Does anything change if you factor in the dividends of those 5 companies?

andy_threos_io2• 6 years ago

Dividends are around 1-5%, large caps are closer to 1% (or 0) (AAPL 0.89%, MSFT 1.04%)

beezle5• 6 years ago

In fact, that is quite interesting - Software, Industrial, Networking, Semi, Retail.

asplake• 6 years ago

I'd have been surprised if it had turned out otherwise. I'd expect some kind of power law distribution, and it's not news that the biggest sticks are, well, huge. If the distribution falls away quickly enough, the result follows.

jimbokun• 6 years ago

But the point is the concentration in the top 5 stocks has increased relative to recent years.

daxfohl• 6 years ago

The interesting thing is it's all one industry. Has that ever happened before? Oil was pretty dominant for a while, but nothing like this.

namdnay• 6 years ago

I don't think it's fair to say it's one industry. Apart from the fact that they heavily use the internet, can you really say that Amazon and Facebook are the same industry? One is a social network, the other is a retailing and infrastructure shop

Cthulhu_3• 6 years ago

Apple is also primarily a hardware company, Microsoft has it as part of its business (mostly successful in gaming).

taneq• 6 years ago

There was a brief period where it was tulips...

throw0101a10• 6 years ago

It's happened with basically all industries: oil, canal building, rail roads, cars. Even bicycles:

Technological revolutions are often accompanied by substantial stock price reversals, but previous literature has produced competing explanations for why this is the case. This paper brings new evidence to this debate using data from the innovation-driven British Bicycle Mania of 1895-1900, in which cycle share prices rose by over 200 per cent before collapsing by more than 75 per cent. These price patterns are not fully explained by fundamentals or by changes in the nature of risk associated with cycle shares. Instead, the evidence from the Bicycle Mania supports the hypothesis of Perez (2009), who argues that new technology, high short-term profits, and loose monetary conditions increase the level of speculative investment, ‘decoupling’ share prices from fundamentals.

* https://www.econstor.eu/bitstream/10419/148345/1/87292534X.p...

Recent video by Ben Felix of PWL Capital on the topic, "Investing in Technological Revolutions":

Exciting new technologies, and the companies that create them, seem like obvious investment opportunities. Why wouldn’t you want to invest in the companies leading a new world-changing technological paradigm?

* https://www.youtube.com/watch?v=UZnVt_CvL3k

solatic• 6 years ago

I'm not sure whether people understand just how big of a problem this is. Resilient economies are well-balanced economies. When Big Tech falls - and it will eventually fall, because no industry is immune to corrections or busts - - the effect on the wider economy will be all the greater. The greater a share of the stock market that Big Tech holds, the larger the blast radius their failure will impose on the wider economy.

That FAANG constitutes such a large part of major market indices communicates a failure on the part of regulators. Not just the kind of regulation that technologists care about, i.e. protecting free software and open access, but economic regulation as well, that tries to smooth out the business boom and bust cycles and care about the health of the wider American economy.

snarf212• 6 years ago

And it isn't just FAANG. Look at Disney and Comcast and all the other conglomerates. The SEC and FTC have totally failed our country in the 21st century.

andrewmcwatters3• 6 years ago

I frequently think about the fact that such organizations, from the outside, seem like the people now working there have forgotten what they are supposed to be doing for the American people.

The most prominent example I can think of is Microsoft getting in all this trouble over bundling a browser with Windows and yet this proliferation of forced App Stores runs rampant in the industry.

Where in world is the FTC now? All of these people should be fired. They’ve been asleep for 20 years.

throw0101a10• 6 years ago

You may be interested in the book Goliath by Stoller:

Americans once had a coherent and clear understanding of political tyranny, one crafted by Thomas Jefferson and updated for the industrial age by Louis Brandeis. A concentration of power, whether in the hands of a military dictator or a JP Morgan, was understood as autocratic and dangerous to individual liberty and democracy. This idea stretched back to the country’s founding. In the 1930s, people observed that the Great Depression was caused by financial concentration in the hands of a few whose misuse of their power induced a financial collapse. They drew on this tradition to craft the New Deal.
In Goliath, Matt Stoller explains how authoritarianism and populism have returned to American politics for the first time in eighty years, as the outcome of the 2016 election shook our faith in democratic institutions. It has brought to the fore dangerous forces that many modern Americans never even knew existed. Today’s bitter recriminations and panic represent more than just fear of the future, they reflect a basic confusion about what is happening and the historical backstory that brought us to this moment.
The true effects of populism, a shrinking middle class, and concentrated financial wealth are only just beginning to manifest themselves under the current administrations. The lessons of Stoller’s study will only grow more relevant as time passes. Building upon his viral article in The Atlantic, “How the Democrats Killed Their Populist Soul,” Stoller illustrates in rich detail how we arrived at this tenuous moment, and the steps we must take to create a new democracy.

* https://www.goodreads.com/book/show/40538538-goliath

There's been a back and forth over the last century on this topic.

Tsiklon2• 6 years ago

I have no knowledge in this field whatsoever, but is this more an indication that we shouldn't be using the S&P 500 and similar indices as an overall indicator of the performance of the economy, is there value in looking at these indices absent of Big Tech?

andrewmcwatters3• 6 years ago

There is an S&P 500 Equal Weight Index, but it makes essentially no difference.

smabie2• 6 years ago

correlation between all stocks in the S&P 500 is so high that removing big tech makes little difference.

Also, a major part of the problem in my view is the blind indexing of equities that most investors use for the bulk of their portfolio. Market cap weighting essentially results in what essentially a momentum overlay: new money is allocated disproportionately to the stocks with the highest market cap, resulting in those stocks going up even more.

throw0101a10• 6 years ago

Historical data says otherwise. Right now the five biggest make up 23%, in April they were 21.38%.

In 1964 the five biggest made up 27.60%:

* https://theirrelevantinvestor.com/2020/04/21/the-only-thing-...

In 1964, AT&T alone made up 8.90% and in 1969 IBM alone made up 9.00%.

The author of this story needs to look into history more and go back more than just thirty years.

Companies and industries rise and fall and have for centuries in the stock market:

* https://en.wikipedia.org/wiki/Technological_Revolutions_and_...

This paper argues that the two boom and bust episodes of the turn of the Century –the Internet mania and crash of 1990s and the easy liquidity boom and bust of 2000s– are two distinct components of a single structural phenomenon. They are essentially the equivalent of 1929 developed in two stages, one centred on technological innovation, the other on financial innovation. Hence, the frequent references to that crash, to the 1930s and to Bretton Woods, are not simple journalistic metaphors for interpreting the “credit crunch” and its solution, but rather the intuitive recognition of a fundamental similarity between those events and the current ones. The paper holds that such major boom and bust episodes are endogenous to the way in which the market economy evolves and assimilates successive technological revolutions. It will discuss why it occurred in two bubbles on this occasion; it examines the differences and continuities between the two episodes and presents an interpretation of their nature and consequences.

* PDF: http://www.carlotaperez.org/downloads/pubs/C.PEREZ_CJE_Doubl...

Balgair• 6 years ago

I would suspect that most of the stock markets over time are distributed as a power law.

These distributions come up all over the place, from the sizes of asteroids, to the populations of cities. I'm not sure exactly why this is, but I seem to recall that it's related to the integrals of normal distributions.

rjkennedy98• 6 years ago

I'm not sure whether people understand just how big of a problem this is.

I'm usually the last to defend the construction of the US economy, but I think this is a bit of an overreaction. The stock market is not the economy. Big Tech bubbles are bad, but this isn't 2008 where people lost their houses because of financial engineering.

I think the bigger story (and issue) is just how few people are involved in and benefiting from Tech. These companies have massive market caps because they employ a tiny amount of people relative to how much money they make. For every one tech worker making high six figures there are a 50 people doing low-level healthcare service work. The vast majority of Americans own trivial amounts of stock, so they don't even benefit indirectly from the Tech bubble. All of this is just exacerbating the radical divergence of the haves and have-nots in our economy.

chmod775• 6 years ago

I'm not sure whether people understand just how big of a problem this is. Resilient economies are well-balanced economies.

You seem to be under the misconception that the stock market somehow reflects the actual economy, in fact you seem to think that the stock market is the economy.

Those "top 5" companies taken together are less than 5% of the actual US economy, regardless of whichever way you want to calculate that (revenue/profit+wages vs GDP, ...)

The ones hurt by an investment failing are just the investors themselves, which is the whole point of investment. You take the risk and reap the rewards.

The only exception is when a "too big to fail" whatever (this narrative is complete bs btw) made bad investments again, so the government, and by proxy the taxpayer, steps in to finance the gambling addiction of people who are politician's retirement plans. Now you have made a considerable impact on the actual economy.

throw0101a10• 6 years ago

The ones hurt by an investment failing are just the investors themselves, which is the whole point of investment. You take the risk and reap the rewards.

Counter-intuitively, investing in the Top 10 stocks has actually gotten you worse results than the market average.

If you took Top 10 stocks at the beginning of each decade (1920, '30, …, 2010), and followed how it did for that decade (e.g., 1920-1929) it would done worse than the market average (by 1.51% annually on average):

* https://www.youtube.com/watch?v=foqswJT3Spc

thinkloop• 6 years ago

microsoft: invented computing

apple: invented modern computing

google: makes the internet

amazon: earth's store

facebook: like button

Five Biggest Stocks Are 23% of S&P 500 Market Cap

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