It can be very easy to forget that the stock market is a market of thousands of individual stocks doing their own thing. While major averages like the S&P 500 are helpful and can give a rough idea of how the overall market is behaving, they also have some limitations due to the way they are constructed. The Dow Jones Industrial Average, for example, is price-weighted, so stocks with a higher price have more of an impact on the performance of the index than stocks with a lower price (which doesn’t really make much sense). Meanwhile, the S&P 500 is market-cap-weighted, which makes more intuitive sense than a price-weighted index like the Dow, but it also means that the biggest stocks in the market are always going to have a disproportionate impact on what happens with the index itself (that’s just the way math works). Due to this effect, a lot has been made recently of the fact that only a handful of stocks are responsible for the majority of the S&P 500’s gains so far this year. And yes, this is a fact, as the data below show, but the danger here is that too many people seem to be misinterpreting the information as this has been a narrow market or that only a handful of stocks have been going up, which is not the case at all.
As of about mid-day yesterday, six stocks in the S&P 500 – Netflix, Amazon, Microsoft, Apple, Alphabet, and Facebook – had collectively contributed 5.09 percentage points of the S&P 500’s 6.21% price return year-to-date, or about 82% of the returns overall. At first, this sounds horrible and scary and might lead one to believe that we’re secretly in a bear market that no one told these six companies about. Yet, once again, this phenomenon says much more about the way the S&P 500 is constructed than it does about the breadth or health of the stock market. The six aforementioned stocks also happen to be five of the six largest companies in the market by market cap, with Netflix a still significant 35th in market weight. If these stocks have a good year, as they mostly have so far in 2018, it should come as no surprise that they are having a significant effect on cap-weighted indices like the S&P 500. It’s like being surprised that the 3-4-5 hitters in a baseball lineup are driving in a disproportionate number of runs!
What follows is a breakdown of the “big six” stocks by both 2018 year-to-date price performance within the S&P 500 and their current market cap (as of mid-day yesterday):
• Netflix (NFLX): 3rd in performance; 35th in market cap
• Amazon (AMZN): 6th in performance; 2nd in market cap
• Microsoft (MSFT): 56th in performance; 4th in market cap
• Apple (AAPL): 72nd in performance; 1st in market cap
• Alphabet (Google) (GOOG): 104th in performance; 3rd in market cap
• Facebook (FB): 254th in performance; 5th in market cap
What jumps out initially is that, other than Netflix and Amazon, the rest of these stocks haven’t performed as great as most probably believe when considering that, collectively, they are responsible for 82% of the S&P 500’sperformance this year. The latter four aren’t even in the top 10% of S&P 500 stocks, return-wise, and Facebook is actually underperforming the S&P 500 by a fair margin.
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