Reliance on Mega-Cap Tech Stocks
The big four tech giants index concentration and performance
A continued theme over the past ten plus years has been the utter dominance of the mega-cap tech stocks. They’ve been referred to by a number of names and acronyms. I refer to them as MAAA, which stands for Microsoft MSFT 0.00%↑, Apple AAPL 0.00%↑, Alphabet GOOGL 0.00%↑ and Amazon AMZN 0.00%↑.
All four of these companies are outstanding businesses and their leadership continues to evolve and direct them into new innovations and technology. What they’ve all accomplished and continue to do is really fascinating.
If you invest in the stock market in some way, whether though a 401K, mutual funds or ETFs chances are highly likely you own these stocks.
Their growth in size has led them to have an outsized weighting in the S&P 500 index. When you hear, “buy the overall stock market” or “buy the S&P 500 index” what you’re doing is buying stock in the 500 leading publicly traded companies in the U.S.
When you buy the S&P 500 you’re not buying the same amount of each of the 500 companies. You’re buying a market cap weighted index of those 500 companies. Here is what a visual of that looks like.
For example, if you invest $1,000 into an S&P 500 index, you aren’t putting $2 into each of the 500 companies. With the index weighting, you’re actually investing the following amounts in the four mega cap stocks with that $1,000.
Apple $72
Microsoft $65
Alphabet $35
Amazon $28
The combination of the top two stocks in the S&P 500 weighting are now at an all-time high. Apple and Microsoft have now eclipsed 14% of the S&P 500 index.
If we expand that a little further to include the top four companies; Apple, Microsoft, Amazon and Alphabet, the weighting reaches over 20%. One step farther to include the top 10 S&P 500 holdings and it’s almost 30%.
Expanding off the prior example, $200 of the $1,000 you invested is in those four stocks. Almost $300 is into the top 10 holdings.
When the weighting is as much as it is, investors aren’t as worried when the performance keeps up. Since 2008, it’s really hard to argue with the superior returns that these four companies have provided over the long-term.
In the past 15 years there have only been two years where all four of these stocks were down in the same year. The S&P 500 has been down in three of those 15 years. The cumulative returns of Apple, Microsoft, Alphabet and Amazon over this time far exceeds that of the S&P 500.
So far in 2023 their returns have steamrolled the S&P 500.
Apple 37.58% YTD
Microsoft 30.12% YTD
Alphabet 34.10% YTD
Amazon 32.14% YTD
S&P 500 7.47% YTD
Investors can’t complain about the over reliance or over weighting of these four companies in the S&P 500 index when their performance is what it has been. They’ve been a flight for safety of late and continue to lead the overall market. Like other things in investing, it can continue to work until one day it doesn’t.
History shows that at some point this does change. New leaders usually emerge. But for many years these four have all bucked this trend. We’ll see how long this leadership and out performance continues.
Until then, you don’t dare short them. You don’t want to trade the them. You almost have to just own them.
Disclosure- I’m long Apple, Amazon and Alphabet.
The Coffee Table ☕
Morgan Housel wrote an excellent post called Some Things I Think. Just some great tidbits from a great writer. Something you have to read to appreciate.
- had a post called 5 Principles for Long Term Investing. If you’re an investor, this is a reminder of the principles that are often forgot about. Maintaining focus is hard.
I recently started watching The Lost Kitchen on HBO. Everyone knows I’m a big foodie and this show is right up my alley. The Lost Kitchen is one of the hardest restaurants to get into. It’s in a small town in Maine and they only take reservations by mail via postcards. It’s all luck-of the draw. A unique story and unique show.
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