The US stock market’s heavy concentration in a handful of stocks has raised concerns that falls in their share prices could plunge the wider market into a tailspin.
Five tech giants – Amazon, Alphabet, Apple, Facebook and Microsoft – make up something between a fifth and a quarter of the leading US blue-chip index, the S&P 500.
Because of their dominance, falls in their share prices weighed on the S&P 500 in the past couple of days, even though stocks of hundreds of other companies were rising.
US stock markets have been dragged lower by falls in tech companies stocks
Apple alone, with its valuation of about $1.6trillion, is now worth 80 per cent of the total market capitalisation of the FTSE 100, which is around £1.57trillion – or $2trillion. While Amazon and Apple combined are 50 per cent bigger than the UK index.
After years of stellar share price rises, many tech companies have continued to make gains in recent months thanks to the coronavirus pandemic. Amazon has been the best performer this year, with shares up about 62 per cent so far this year.
But there are fears that, if the massive rise in tech stocks was to die out, they would drag down the market with them.
Shares in Facebook fell another 0.8 per cent yesterday, while Apple dropped 0.25 per cent, Microsoft 0.6 per cent, and Google’s parent Alphabet dropped 0.6 per cent, while Amazon rose by 0.75 per cent.
The S&P 500 index closed 20 points or 0.62 per cent down at 3,215.6.
The US big five tech giants – Amazon, Alphabet, Apple, Facebook and Microsoft – make up something between a fifth and a quarter of the US bluechip index, the S&P 500
Neil Wilson, an analyst at Markets.com, says the Nasdaq – on which most tech companies are listed – suggests investors are already trimming their exposure to such stocks.
‘The moves in the Nasdaq of late indicate investors are trimming their exposure to these big tech names, so the slate of earnings will be crucial for determining where we go next on Wall Street.’
The Nasdaq fell 97 points or 0.9 per cent to 10,483 yesterday.
How does the FTSE 100 index compare?
The Footsie is no stranger to investors showing a high level of concentration in big names either.
Unilever, AstraZeneca, BHP Group, Royal Dutch Shell and Rio Tinto account for 30 per cent of the $2.17trillion (£1.70trillion) market cap of the Footsie, or around £510billion.
If drugs giant GlaxoSmithKline is added to the list, the six of them make up 35 per cent of the index.
Unilever, AstraZeneca, BHP Group, Royal Dutch Shell and Rio Tinto account for 30 per cent of the $2.17trillion (£1.70trillion) market cap of the Footsie (Source: Reuters Eikon, 24 July)
The market cap of these UK’s top six companies, at around £590billion, is almost the same as the next 15 top companies listed on the Footsie, which have a combined market cap of around £600billion.
Similarly to the US stock markets, big swings in share price movements of the biggest companies by market valuation can have a big impact on the overall market. The index was 1.4 per cent down yesterday at 6,123.8.
But Wilson says the difference between the S&P 500 and FTSE 100 is that concentration in the latter is spread across different sectors, not just technology.
‘The good news for the FTSE 100 is that it’s concentrated in a much more diverse range of stock sectors than simply technology, ‘ Wilson says.
‘These are also generally more defensive stocks.’
Shares in drugs giant AstraZeneca are about 15 per cent higher in the year to date, with the company recently boosted by promising results of human trials of a coronavirus vaccine it is developing with Oxford University.
Consumer giant Unilever is up 7 per cent this year, with the company behind Domestos benefiting from rising demand for cleaning products during the pandemic.
But oil giant Shell has been underperforming, with shares down 45 per cent since January mostly down to a big decline in oil prices. Rival BP has also lost 37 per cent of its value.
Banking giant HSBC has also slumped 38 per cent this year, whilst Lloyds is some 50 per cent lower.
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