When investors turn to market newsmakers they are often given S&P 500 index performance as a proxy for how the stock market has performed for the day, week, month, year. What they don’t readily publicize is how many other thousands of stocks are in the investment market and how these stocks have performed. International, U.S. small capitalization and U.S. mid-capitalization stocks are very substantial holdings in many investors diversified portfolios that are not represented in the S&P 500 index. Furthermore, it is not always mentioned how much a select few individual stocks are driving performance of the S&P 500 index.
For much of the past 10 years there has been discussion of the FAANG stocks, which is an acronym for Facebook, Apple, Amazon, Netflix and Google. FAANG stocks have dominated stock market performance for much of the past 10 years and this trend has not abated in 2021.
The top 10 companies in the S&P 500 Index now account for 29.3% of the total market capitalization. This heavy weighting has been growing rapidly since 2016, as represented in the chart from JPMorgan Asset Management Guide to the Markets below. There was a slight dip in 2020 when technology stocks lagged for a very short time. However, leadership has once again taken hold.
The top 10 companies in the S&P 500 Index include:
AAPL Apple Inc. 6.1%
MSFT Microsoft Corporation 5.8%
AMZN Amazon.com Inc. 3.9%
FB Facebook Inc. Class A 2.2%
GOOGL Alphabet Inc. Class A 2.2%
GOOG Alphabet Inc. Class B 2.1%
TSLA Tesla Inc. 1.7%
BRK.B Berkshire Hathaway Inc. Class B 1.4%
NVDA Nvidia Corporation 1.4%
JPM JPMorgan Chase & Co. 1.3%
JNJ Johnson and Johnson 1.2%
The average weight of the other 490 companies in the S&P 500 is a paltry 0.14%. Given the huge weight that rests on these large stocks, the S&P 500 performance can’t help but be dominated by their performance.
Furthermore, the Technology sector has also grown to a substantial weight, representing 27.6% of the S&P 500 index. The next largest sector represented in the S&P 500 is Health Care at 13.3%, or less than half the weight of the Technology sector. Sector weights have become heavily skewed to Technology with several sectors representing very small weights in the index:
Technology 27.6%
Health Care 13.3%
Consumer Discretionary 12.4%
Financials 11.4%
Communication Services 11.3%
Industrials 8.0%
Consumer Staples 5.8%
Energy 2.7%
Real Estate 2.6%
Materials 2.5%
Utilities 2.5%
It is important to be aware of these discrepancies to fully understand performance of a diversified portfolio. When comparing account performance versus the S&P 500 index alone, we are ignoring important parts of the investable market that can be significant drivers of performance at different times.
Bonds and commodities are also important pieces of a diversified portfolio, in additional to international and smaller cap stocks. In fact, in 2021 commodities have experienced strong performance as rising oil prices and the idea of inflation have increased.
A strong investment portfolio will look at all areas of the market and diversify while seeking those areas that can perform better than others. Every day we see a shift in areas of the market that perform well and those that underperform. This shifting performance is what makes a diversified portfolio with a longterm time horizon so important for investors. It is important for us all to be aware of what news is being shared and what it really means for investments.
Historically, it has been rare for a select number of stocks to dominate the index for a sustained period of time. Does this mean that I think the S&P 500 is in for a decline, or that these stocks will go down? Not necessarily. It may just mean that a period of outperformance by stocks that represent a smaller portion of the index may be in store in order to balance out exposure.
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