Dear clients,
Never before in the history of US equities has a small group of companies from one industry had such an impact on the entire market. Six companies — Apple, Microsoft, Alphabet, Amazon, Nvidia and Meta Platforms — now have a combined valuation of around $10 trillion and account for more than a quarter of the total market capitalisation of the S&P 500.
All of these stocks have doubled in value in 2023 — and Nvidia and Meta more than doubled — thanks to the dawn of artificial intelligence and expectations that the Federal Reserve will soon halt interest rate hikes. The benchmark index is up 8% in 2023, but its return is down to just 2% if technology companies are excluded. The S&P 500 is also well behind the technology-heavy Nasdaq Composite, which has entered bull market territory, jumping 22% this year.
Historically, it is rare for a handful of stocks from one sector to make up such a large proportion of the S&P 500. The last time the five largest valuation companies accounted for a quarter of the total market value of the index was in the 1960s, according to Schroders. It is also the first time in history that all five of the largest publicly listed companies represent the same industry.
However, this is not all good news for investors.
It is tempting to view the dominance of the technology sector as a good thing. But single-industry stocks tend to be vulnerable to the same macroeconomic factors — such as rising interest rates, which often hit technology stocks harder than other companies because they are more reliant on borrowing cash.
The overall size of the S&P 500 market is so concentrated around technology companies that it is more vulnerable to sharp price swings than before, Minerva Analysis said. When there is a narrow group of leaders, there is a big risk if something bad happens to technology. If interest rates rise to 7%, it will be bad news for the whole market.
So while the tech giants have provided a surprise rally in equities in 2023, their rising market capitalisation could end up being more of a curse than a blessing for investors.
