This week, Goldman Sachs published the chart to the right. It clearly shows the five largest companies in the S&P 500 Index (Facebook, Amazon, Apple, Microsoft, and Alphabet (formerly Google)) have risen 35% this year while the index itself was up 2% (at the time of writing). The big hook is when removing these five giants the remaining companies have collectively registered a decline of 5% year-to-date. Ouch!
Just as the stock market is always forward looking, as investors, we should do the same. This chart presents a fact at this moment in time. That’s great, but it’s more important to digest it (with the context of what we know about the stock market) and then use it to shape our opinion of the future. What does it mean to investors when five large companies have severely outpaced the rest of the stock market?
Historically, the five largest stocks (as measured by market capitalization) make up 14% of the S&P 500 Index. Per the chart to the right, the top five currently make up 22% of the index… by far the highest percentage in the past 40 years. Whenever they get this frothy there is a point where one of two things happen: 1) The five behemonth return to earth and their prices correct or 2) all the other securities make up loss ground.
Of course, this is technical talk (i.e., looking at charts). Fundamentally, Amazon, Apple, Facebook, Microsoft and Alphabet may be so unstoppable that they deserve these giant market capitalizations and will only head higher. Time will tell on these five, but what about the other remaining companies… this is where these statistics could help shape your opinion of the stock market future.
The current market consensus is that it has run too far too fast (especially in the current environment) so it is overvalued. But is it? Of the remaining stocks, 65% of them have year-to-date returns less than the index itself. Of these 329 stocks, nearly half of them have shedded at least 20% of their value this year, and a third of them are down 30%+. This hardly signals a tide that is so strong that all boats have risen.
Of course, the largest five stocks are not the only companies to trade in the green for the year. Per my math, 35% are trading above the S&P 500 index level. But, if you listen to the news, you would think the stock market only goes up… insinuating ALL stocks are going up, hence, the stock market needs to correct to better reflect a true value. Clearly, this is not the case.
As fundamental, long-term investors it is definitely harder to find really undervalued stocks today then it was in March. Back then, finding great companies at wonderful prices was like shooting fish in a barrel. Today, it takes a little more work, but they exist… and just maybe the stock market (as measured by the S&P 500 Index) is not as overvalued as it appears. Time will tell!
Note: Nothing contained herein this letter should be considered to be investment advice, research or an invitation to buy or sell any securities.