I love it when I find a chart/graphic that makes you think, and think, and think some more. Look no further then this chart… The Largest Stock in the S&P 500 (as measured by market capitalization). On the surface, this chart simply tells us: 1) IBM was dominant for nearly two decades, 2) AT&T was a massive company way back when, and 3) Over time the stock market gets closer to valuing a company accurately (i.e., these companies were truly the biggest of their time). But, for me, we view the stock market as a forward looking instrument (i.e., we are trying to determine what businesses will do in the future based on recent history), this chart screams there are great days ahead for the stock market investor.
Why you ask? Well, the past 30 years exhibit the breadth of the value that resides in the stock market today and is clearly foretelling a bright future. Let’s examine…
For the first 24 years captured in this graphic (1964 – 1988), TWO companies held the mantel of largest stock in the S&P 500. Over the past 24 years (1996 – 2020), FIVE
companies have ascended to the top of the S&P 500… one company, Microsoft, doing it in two different decades. Probably not too difficult to predict that Mr. Softy would never go away, but to be the most valuable (again) a little more difficult to foresee.
This breadth of greatest, far exceeds what we saw half a century ago. Back then it was Big Blue or bust. They were computing and that was it. In that time, they were fantastic but in hindsight, definitely limiting. Today, the growth of technology has enabled countless number of companies to develop their own ideas, new tech, use of tech, etc. The end result is great companies becoming larger (more valuable) than we have ever seen. In the end, creating immense shareholder value (i.e., a bright future).
The other value metric that stands out is the size of the lead dog (as a percentage of the S&P 500 Index) fifty years ago versus today. In 1969, IBM accounted for 9% of the S&P 500 Index. In 1980, IBM had a $40 billion market value and made up just over 4% of the S&P 500. Fast forward forty years and Microsoft makes up 5.5% but has a market value over $1 trillion. In forty years, the top company has a market value 25 times greater than prior (1980) and made up a slightly larger percentage of the overall S&P 500. Let that sink in for a minute.
Take it a step further… at 4% IBM was the largest company in an S&P 500 with a total market capitalization of $1 trillion. Microsoft by itself is worth over $1 trillion! This is remarkable in itself and clearly demostrates that capitalism works (i.e., value is created in a capitalistic society). But even more astounding, is what we stated at the outset… Microsoft is not alone! If Microsoft is valued at $1 trillion, but only accounts for 5%+ of the S&P 500, there are some other great companies creating tremendous value making up the rest of the index!
With an endless barrage of “bad news” these days it is always good to look further out in an effort to settle ourselves. The past few months have seen a worldwind of negativity (much of it warranted), but it is tough for anyone to say we are not living in the greatest of times. In fact, I would argue our response to the pandemic could not have been done 20 or 30 years ago. As we pass this moment, we will count ourselves fortunate to live in such an innovative period of time… and thus the stock market will reflect this as well.
Note: Nothing contained herein this letter should be considered to be investment advice, research or an invitation to buy or sell any securities. The chart above is from Visual Capital.