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Big Tech stocks surged in 2023, with Meta and Nvidia both climbing over 100%.
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These gains have only increased the tech giants’ dominance of the S&P 500.
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The higher concentration levels could make the benchmark vulnerable to wild swings.
Never before in the history of US equities has a small group of companies in the same industry had such a grip on the entire market.
Six stocks – Apple, Microsoft, Google parent Alphabet, Amazon, chipmaker Nvidia and Facebook owner Meta Platforms – now have a combined valuation of around $10 trillion and represent more than a quarter of the total market capitalization of the S&P 500.
But that could be bad news for investors.
Soaring stock prices
All stocks have jumped double digits in 2023 – Nvidia and Meta having more than doubled in price – thanks to the AI craze and the expectation that the Federal Reserve will soon suspend interest rate hikes.
Their massive advances explain most of the S&P 500’s year-to-date gains.
The benchmark is up 8% in 2023 – but its returns shrink to just 2% if technology is excluded, as the price performance of the S&P 500 Ex-Technology ETF fund shows. ProShares:
The S&P 500 is also far behind the tech-heavy Nasdaq Composite, which entered bullish territory with a 22% jump this year.
Unprecedented dominance
It’s historically rare for a handful of stocks in the same sector to make up such a large portion of the S&P 500.
The last time the five largest companies by valuation accounted for a quarter of the index’s total market capitalization was in the 1960s, according to data from Schroders.
It’s also the first time that the five largest publicly traded companies – currently Apple, Microsoft, Alphabet, Amazon and Nvidia – have all come from the same industry.
Stock market vulnerability
It might be tempting to see the dominance of technology as a good thing.
But stocks in the same sector tend to be vulnerable to the same macro factors, like rising interest rates, that often hit tech stocks harder than other companies because they’re more reliant on borrowing cash.
The S&P 500’s overall market capitalization is so technology-focused that it’s more vulnerable than it was before to massive price swings, according to Minerva Analysis founder Kathleen Brooks.
“When there’s a small group of leaders, there’s a big risk if something bad happens to the technology,” she told Insider. “If interest rates hit 7%, as Jamie Dimon warned the other day, that becomes bad news for the whole market.”
So while Big Techs fueled the surprise rally in equities in 2023, their rising market caps could eventually prove more of a curse than a blessing for investors.
Learn more: Facebook parent company Meta and Nvidia both saw their stock prices double in the first 5 months of 2023
Read the original article on Business Insider