Published - May 29th, 2023 @ 3:58 PM (GMT+2 )
Big Tech Stocks Surge, Solidifying Dominance in the S&P 500
In 2023, Big Tech stocks, led by Meta and Nvidia, experienced significant jumps, with both companies soaring over 100%. These impressive gains have further solidified the dominance of technology giants in the S&P 500, but they have also raised concerns about the vulnerability of the benchmark index to unpredictable fluctuations. The concentration of these stocks, representing a small group of companies from the same industry, has never been witnessed before in the history of US stocks. With Apple (NASDAQ:AAPL) , Microsoft (NASDAQ:MSFT) , Google (NASDAQ:GOOGL) parent Alphabet, Amazon (NASDAQ:AMZN) , Nvidia (NASDAQ:NVDA), and Facebook (NASDAQ:META) owner Meta Platforms collectively valued at approximately $10 trillion, they now make up over a quarter of the S&P 500's total market capitalization.
Soaring tech stock prices drive significant gains in S&P 500
The soaring share prices of these tech stocks, driven by the AI craze and the anticipation of the Federal Reserve's interest-rate hike pause, have accounted for a significant portion of the S&P 500's gains year-to-date. While the benchmark index has seen an 8% increase, excluding the tech sector, the returns shrink to just 2%. In contrast, the tech-heavy Nasdaq Composite has surged by 22%, entering bull-market territory this year.
The immense concentration of Big Tech companies in the S&P 500 is historically rare, with data from Schroders revealing that the last time the top five companies accounted for a quarter of the index's total market cap was in the 1960s. Additionally, this is the first time that all five of the largest publicly-listed companies, namely Apple, Microsoft, Alphabet, Amazon, and Nvidia, hail from the same industry.
Tech stocks' dominance exposes market to vulnerabilities
While the dominance of tech stocks may seem optimistic at first glance, it also exposes the market to certain vulnerabilities. Companies within the same industry often face similar macroeconomic factors affecting their performance. For instance, rising interest rates tend to impact tech stocks more due to their reliance on borrowed cash. Kathleen Brooks, the founder of Minerva Analysis, warns that the S&P 500's concentration in tech companies leaves it more susceptible to significant price swings. If adverse events, such as rising interest rates to 7%, were to occur, the entire market would be at risk.
While Big Tech companies have been instrumental in powering the surprising rally of stocks in 2023, their expanding market capitalizations may eventually be more of a curse than a blessing for investors. The dominance of these tech giants raises concerns about the market's stability and the potential risks associated with a concentrated portfolio heavily influenced by the tech sector.
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