Apple; Microsoft; Amazon; Facebook; Alphabet: Will The S&P500 Be Such A Great Index Without These Tech Stocks?

In recent months, there has been increased interest in the topic of investing, from both very seasoned investors who have weathered numerous market crashes and even the less experienced investors with limited knowledge.

Why this has been the case? The wild swings in market prices, due to COVID-19-led uncertainties, have been of a historic magnitude, capturing the collective attention of everyone.

In the middle of February, we saw the longest running bull market in the history of the stock market come to an end. We then witnessed the fastest ever 20% decline in history to enter a bear market within 16 days. Next, we emerged into a new bull market just a short few weeks after that – surpassing post COVID-19 highs even as pandemic and geopolitical uncertainties continue.

In Singapore, most of this holds true as well – except that we have not recovered to our pre-COVID-19 levels just yet.

Read Also: COVID-19 Stock Market Crash: Why I Always Prefer The S&P500 Over The Straits Times Index (STI)

5 Biggest Technology Companies On The S&P500

Forming the largest sector on the S&P500, technology companies make up 28.7% of the index. The five biggest stocks on the S&P500 are also all technology stocks: Apple, Microsoft, Amazon, Facebook and Alphabet.

While most of us are familiar with the acronym FAANG, it is Microsoft rather than Netflix – which contributes the N in FAANG – which we should be more aware of. Today, Netflix has a market capitalisation of US$227.6 billion, while Microsoft has a market capitalisation of US$1.6 trillion, or nearly seven times larger than Netflix.

These key stats will give you a better idea of the magnitude of the five biggest stocks on the S&P500.

Technology Companies’ Impact In The S&P500 Index

Despite COVID-19-led market crash in the February to March 2020 period, the S&P500 is trading above pre-COVID-19 levels – near its all-time highs.

If we look at the chart below, we can see that all five tech stocks beat the S&P 500 performance in the year-to-date. It isn’t by a small margin either.

Here are the returns for each of them:

S&P 500 – 6.9%
Apple – 64.7%
Microsoft – 37.8%
Amazon – 82.3%
Alphabet – 22.8%
Facebook – 41.84%

Source: Yahoo Finance

The returns from the big five technology stocks dwarf the already respectable returns achieved by S&P 500 index. Given such a disparity in returns and that these five technology stocks also contribute the biggest weightage to the S&P 500 index, it’s fair to say the S&P 500 returns would be very mediocre without them.

Goldman Sachs Investment Research wrote about the returns the S&P 500 index would have achieved with and without the five biggest tech stocks, and compared it with the five biggest tech stocks alone. The results are exactly what we would have expected – not great at all.

Source: Goldman Sachs Global Investment Research

This graph was plotted a few weeks ago, but it gives us a good indication of the divergence in the fate of the top five companies on the S&P 500 index (+35%), compared to the remaining 495 companies on the S&P 500 index (-5%).

Should You Avoid The S&P 500 Index?

It would be naïve to say that we should avoid investing in the S&P 500 index simply because of this. The fact is that it is a diversified index, exposed to some of the biggest and highest quality companies remains.

The fact also remains that the five biggest technology companies are showing no signs of a let up, so it may be a risk in itself to remove it from our portfolio.

What we should be aware of, is that the performance of the S&P 500 index, and perhaps the global stock market, is dependent on these big five stocks performing well. If we truly believe in any of the other 495 companies on the S&P 500 index, we may also want to allocate an investment into those stocks on its own.

In the same token, if we are invested in the S&P 500 index, the risk of our portfolio may be increasingly concentrated in these big five stocks. We also cannot ignore the fact that any failure in the big five tech stocks may have repercussions on the performance of the other 495 stocks that are already lagging quite some way behind.

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