Mega caps have been all the rage lately. The top 5 stocks in the S&P 500 index account for more than 20% of the index.1 The top five stocks have been a winning trade the last decade, but can it continue? Hopefully, this article can help put things in perspective.
High Concentration in the Top 5
As you can see it is not the first time in history that the five largest stocks make up a large portion of the index. 2 Concentration in the top five have been lower in the 21st century but if you look back in history it was not uncommon to be much higher.
Apple makes up 5% of the S&P 500
Microsoft made up 4.9% in 1999 and today makes up 5.2%, making it the second largest weighting. Apple currently makes up 5.5%, making it the largest in the S&P 500 index. It is not the largest weighting for a single stock if we look back in history.3 Back in the 1970s, IBM made up 9% of the index!
In 2015, an equal weight portfolio of the top 5 YTD returned 40% vs S&P 500 of 1%. Back then many people claimed the top 5 were overvalued and today they say the same thing. Since 2015, that same portfolio has returned 228% vs the 72% for S&P 500 index.4 Shown below are the individual performance of each stock compared to the market.
So far 2020 has been another strong year for the mega caps. At some point you would think that years of outperformance would slow down. Nobody knows when or if that will happen. The key is to know what you own and make sure you are comfortable with the risk you are taking in your portfolio.
1Data from YCharts as of 7/28/2020. Top five makes up 21.64% of S&P 500 index.
2Chart from Jim Bianco @biancoresearch on Twitter
3Chart from Jim Bianco @biancoresearch on Twitter
4Data from YCharts. From 3/24/2014 to 7/29/2020
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy ensures success or protects against loss.