By: Spencer Israel
Just like headlines about trade tensions with China, the question of whether or not the group of the largest mega-cap tech stocks has become too powerful seems to reappear periodically every few weeks.
Despite its frequent recurrence, it’s not unreasonable to see why some market watchers are concerned. Coming off a decade in which Facebook, Amazon, Apple, Netflix, Microsoft, and Alphabet dramatically outperformed the broader U.S. market, that outperformance has only continued in the midst of a pandemic that brought entire economies to a halt.
Though various iterations of “FANG” exist (some exclude Microsoft or Netflix), the point still stands that the big have only continued to get bigger. Through June 25, the year-to-date performance of the group was as follows:
Amazon: up 48%
Netflix: up 41%
Microsoft: up 25%
Apple: up 22%
Facebook: up 14%
Google: up 6%
S&P 500: down 5%
As Michael Batnick of Ritholtz Wealth Management noted this week, AMZN, MSFT, AAPL, FB, and GOOGL “are now 22% of the S&P 500, up from 10% only 5 years ago.”
This chart from Yardeni Research shows just how dominant the group (not including Microsoft) has been compared to the rest of the index dating back to 2013.
Source: Yardeni Research
But you already know this. The question is whether investors should be concerned or not. The argument for the bears is this continued outperformance has placed us in a similar situation to the dotcom bubble. This chart from Goldman Sachs made the rounds recently. It shows the percentage that the largest five and largest 25 companies have taken up of the S&P 500 dating back to 1990.
Source: FactSet, Goldman Sachs Global Investment Research
As you can see, we’re not quite at 1999 levels yet. But the concentration at the top of the index is increasing.
Of course, it’s easy to cherry-pick the data. The table below is several months old, but it shows the weighting of the 10 largest stocks in the S&P 500 at the beginning of every decade going back to 1980.
Source: Ben Carlson, S&P Dow Jones Indices, Fortune
You can see how easy this data is to manipulate. The above tables and charts seem to contradict each other:
The FANG stocks were, by and large, the picture-perfect growth stocks of the last decade. Interestingly, FTSE Russell rebalanced Alphabet in its indexes this year to give it partial inclusion in its Value indexes. This shift of Alphabet from growth to part-growth, part-value reflects the maturity of a company is one of the best performers of the last 15 years.
It’s anyone’s guess whether the group will continue to outperform in this decade the way it did for the last one. There may even be a new catchy acronym of growth stocks that catches on. But unless the names at the top fall back to the rest of the pack in terms of market cap, expect this conversation to continue.
The author is long Facebook, Amazon, Apple, Microsoft, Netflix and Google in his retirement accounts.
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