Apple (AAPL), Alphabet (GOOG), Microsoft (MSFT), Amazon.com (AMZN), and Facebook (FB) -- these five companies are the five largest companies in the S&P 500 based on market capitalization. In aggregate, their market value is $2.93 trillion!
Why are we bothering to point out their collective market capitalization? Because size matters greatly in a market-capitalization weighted index like the S&P 500 (and Nasdaq 100 for that matter).
There is more to it than that, though, for individual investors to consider.
So, just how big are these five companies combined? Here are some eye-opening facts for perspective:
- The market value of the S&P 500 financial sector, which is comprised of 65 companies, including JP Morgan Chase (JPM) and Goldman Sachs (GS), is $2.89 trillion.
- If AAPL, GOOG, MSFT, and FB are excluded, the S&P 500 information technology sector would slip from the largest sector by weight (23.1%) to the fourth-largest sector (11.3%)
- AAPL and GOOG each have a larger market capitalization than the S&P 500 utilities, real estate, materials and telecom services sectors
- The cash alone on Apple's balance sheet is greater than the market value of all but nine companies in the S&P 500
- AAPL, GOOG, MSFT, AMZN and FB comprise 44% of the total market value of the Nasdaq 100
- If these companies comprised their own sector, it would be the largest sector in the S&P 500
To say the least, it matters for the broader market when these stocks go up or down -- and even more so when they all move in the same direction at the same time.
In 2017 they have all been moving in the same direction. That direction has been up.
Apple has led the pack with a 33% gain and it has been closely followed by Amazon and Facebook, both of which are up 32%. Alphabet, which is up 26% year-to-date, and Microsoft, which is up 12%, have been the other fine points on this pentagon of outperformance. The average price return for this group is 27.2%.
In comparison, the S&P 500 is up 7.9% year-to-date, the Nasdaq 100 is up 18.8% year-to-date, and the S&P 500 information technology sector is up 19.6% year-to-date.
All Else Not Equal
There has been more to the market's returns this year than just these stocks, yet it is clear the price returns would not be as high as they are without the sponsorship that has been provided by these five heavily-weighted issues, all of which are comfortably outperforming the S&P 500.
With the recent run to record highs for the S&P 500, the performance gap between the S&P 500 Price Index and the S&P 500 Equal-Weighted Price Index has stretched to 175 basis points, which is the widest it has been all year and reflective of a market running to new highs on narrowing leadership.
The members of our esteemed group, which we will dub the "High Five," have all outperformed the S&P 500 since May 17.
Recall the S&P 500 declined 1.8% that day following a New York Times article highlighting a conversation between President Trump and former FBI Director Comey in February in which the president allegedly said he hoped the FBI could drop its investigation of former National Security Adviser, Michael Flynn. Some pundits suggested that was tantamount to an obstruction of justice by the president, which is an impeachable offense.
The stock market literally spent all of a day ruminating over the idea of impeachment before brushing it off and rallying back in a patented buy-the-dip effort. In fact, the S&P 500 has gone up every day since May 17, tacking on 58 points or 2.5%.
Notably, the "High Five" underperformed on May 17, with an average loss of 2.8%; and they have outperformed in the subsequent rebound with an average gain of 4.2%.
The salient point is that their leadership can cut hard both ways.
The individual investor might not think much of the latter point if they don't own the stocks individually, yet it is an important point if they own a passively-managed index fund, or ETF, tied to the performance of the S&P 500 or Nasdaq 100 like the Vanguard S&P 500 ETF (VOO), the SPDR S&P 500 ETF (SPY), or the PowerShares QQQ ETF (QQQ).
In that regard, the individual investor indirectly owns these stocks, so they are not immune to their behavior.
The same can be said if an individual investor owns an actively-managed fund whose performance benchmark is the S&P 500. A fund manager is apt to have exposure (perhaps heavy exposure) to the "High Five," knowing that he/she would need to own these stocks to improve their chance of outperforming the benchmark.
The largest and most recognized asset managers in the business all have exposure to the "High Five," but none more so than Vanguard, which is the largest institutional owner of all five stocks. Fidelity, Blackrock (BLK), T. Rowe Price (TROW), and State Street Global Advisors (SSgA) are also among the top six largest institutional shareholders of the "High Five" as well.
|Stock||Vanguard||BlackRock||Fidelity||T. Rowe Price||SSgA|
|Apple||6.59% (1)*||4.25% (2)||2.96% (4)||1.45% (6)||4.22% (3)|
|Alphabet||5.78% (1)||3.57% (3)||3.92% (2)||3.05% (5)||3.51% (4)|
|Microsoft||6.98% (1)||4.20% (3)||2.10% (6)||2.38% (5)||4.12% (4)|
|Amazon||5.46% (1)||3.34% (6)||3.84% (3)||4.06% (2)||3.46% (5)|
|6.66% (1)||4.07% (3)||5.43% (2)||3.05% (5)||3.95% (4)|
Source: FactSet; Company Filings
*Number represents ranking as institutional holder of stock
What It All Means
The concentration of "High Five" ownership, not just by the largest asset managers but many other small- and mid-sized asset managers as well, is an important thing to consider as the market runs to new highs.
That broad exposure serves a lot of investors well when the upward trend is their friend, yet it can hurt just as bad if the trend shifts for these stocks for any reason spanning from an earnings disappointment from one of the companies to a macro risk event to a valuation-based sell-off.
Because they are widely owned, they could also be widely sold. That would have a cascading effect on the broader market, too, since the leadership of the "High Five" has been instrumental in padding the gains of the broader market. If their leadership faltered, investor sentiment would as well.
The "High Five" are much loved these days and, to be fair, they have fundamentally justified a lot of the affection they have gotten from investors. Nevertheless, there is some sizable concentration risk in the names since they are seemingly favored by "everyone" these days.
AAPL is trading 23% above its 200-day simple moving average; GOOG is trading 19% above its 200-day simple moving average; Microsoft is trading 12% above its 200-day simple moving average; AMZN is trading 20% above its 200-day simple moving average; and FB is trading 16% above its 200-day simple moving average.
Individual stocks and the broader market can stay overbought for an extended period. It is happening right now with these stocks, evidenced by the distance they are trading from their 200-day simple moving averages.
In the context of certain stocks like the "High Five," and the broader market itself, being priced for perfection, one must not forget the weight of expectations, and concentration risk, attached to them. It has created a situation where the downside risk has gotten elevated along with their respective stock prices.