The Big 5 companies in the world at the moment are Microsoft, Apple, Amazon, Facebook and Google (which trade as Alphabet and have Class A and Class C shares listed) and they are having a massive influence on the returns that we are seeing in the stock market today.
The S&P 500 index is made up of the 500 biggest companies in the US based on market cap weighting. So the biggest company in the index, Microsoft, makes up 5.85% of the index while the smallest company, Coty, makes up just 0.005% of the index. At present, the Big 5 tech companies account for 20% of the entire index.
Irish investors are more global in their investment strategies and tend to invest in indexes that track the MSCI World Index, which is much more diversified, investing in 1,600 different companies. Even still, these 5 companies make up 12.8% of that index.
And year to date, those 5 companies have produced a return of 8.35%. The next 94 companies makes up 49% of the index and has losses of -9.35% year to date (I didn’t look past the first 100 companies as this makes up 70% of the index and I didn’t have time to analyse the other 400).
Is this a repeat of the tech bubble that we saw in 2000? I very much doubt it. Not all tech companies are growing the same way as these 5 are. And unlike tech companies in 2000, these companies are sitting on hundreds of billions in cash. This allows them a huge amount of flexibility and in a strong position to buy smaller companies who suit their model.
In this current crises, you can see Facebook and Google being hit the most as their main income source is advertising and this will slow as companies preserve cash themselves. But on a whole, these companies target market is consumers, not businesses and it is on a global scale, so they are selling 24/7.
It is hard to see the US authorities allowing these companies to grow unrestricted. It is not healthy for any stock market to become over reliant on just 5 companies. There are obvious ways this can be done such as separating Amazon the retailer an AWS or Facebook and Instagram (what a buy that company was for Facebook. They purchased it for $1 billion and it generates an annual income of $6.84 billion).
When running for US president, senator Elizabeth Warren said that she would break up these companies if elected. While her bid obviously failed, if Joe Biden wins in November, she may be able to deliver on this promise. If Trump is reelected, who knows but it is still hard to see these companies being allowed to grow at their current rate unchecked.
If you have any questions, drop me an email at steven@bluewaterfp.ie