Outsized stock price gains for Apple Inc and Microsoft Corp mean the two tech titans’ shares have attained unusual status: a combined weight of 10% of the benchmark S&P 500 index.
For some stock watchers, this is an example of worrisome concentration that could undermine Wall Street’s record run. The S&P 500, which many use a proxy for the overall market, is a market-cap weighted index, meaning that large stocks carry more influence.
The last time a year ended with two stocks amounting to at least one-tenth of the S&P 500 was 1982, according to data from Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, when IBM and AT&T amounted to about 10.9% of the index.
As of Monday’s close, Microsoft represented 5.183% of the index with Apple at 4.835%, for 10.018% total, according to Refinitiv data. Their increasingly heavy weight is spurred by their strong outperformance; since the end of 2018, Apple’s share price has doubled and Microsoft’s is up 80% while the S&P 500 has climbed about 35%.
Apple and Microsoft together have a greater weight in the S&P 500 than seven of its 11 industry sectors, including the consumer discretionary and industrials groups.
“A small number of names are fuelling a huge part of this rally,” said Matt Maley, chief market strategist at Miller Tabak, adding that such a “narrow market” is vulnerable to a 7% to 10% pullback.
“It just shows that people are buying and concentrating in momentum stocks rather than buying the overall market because of a strong economy,” Maley said.
Indeed, four stocks – Amazon, Google parent Alphabet, along with Apple and Microsoft – accounted for two-thirds of the S&P 500’s gain so far in 2020, DataTrek Research said in a note on Monday. The index is up 4.4% year-to-date.
Apple and Microsoft also account for 5% of the weight in MSCI’s all-country world index, a closely-watched barometer of global stocks, according to Ned Davis Research. That amounts to a larger market value than 47 of the 48 non-U.S. country markets in the index, all but Japan, according to Ned Davis.
“It’s just not sustainable,” said Tim Hayes, chief global investment strategist at Ned Davis Research.
The risk, Hayes said, is “that at some point these stocks are no longer going to be propping up the market but instead weighing it down.”
“And that would happen in the U.S. and then the U.S. would weigh down the global trend,” Hayes said.
The top-heaviness of the market goes beyond just Apple and Microsoft. The top 10 issues in the S&P 500 accounted for 24.2% of the index’s weight, as of Monday; that would be greater than any year-end mark since 2001, according to S&P Dow Jones Indices.
“Typically, the stocks that fly high at the end of a bull market can fall the hardest,” said Lindsey Bell, chief investment strategist at Ally Invest.
In a recent report, Goldman Sachs noted that the S&P 500 is concentrated in the five largest stocks – Microsoft, Apple, Amazon, Alphabet and Facebook – to a degree not seen since the peak of the tech bubble. At that time in March 2000, according to Goldman, Microsoft, Cisco, General Electric, Intel and Exxon accounted for 18% of the S&P 500 market cap.
However, Goldman says, the current top five companies have lower growth expectations, lower valuations, and a greater re-investment ratio, which suggests “the current concentration may be more sustainable than it proved to be in 2000.”
“To avoid repeating the share price collapse experienced by their predecessors, today’s market cap leaders will need to at least meet – and preferably exceed – current consensus growth expectations,” Goldman’s chief U.S. equity strategist David Kostin said in the Jan 31 note.
Not all investors are concerned. Art Hogan, chief market strategist at National Securities, said such heavy weight at the top of the S&P 500 has been common historically with the market-cap weighted index.
“It’s just different names,” Hogan said.