Big tech presents a problem for investors as well as Congress

A strong year for the largest five US stocks despite the worst recession the country has faced in decades has further expanded their influence on equity markets.

Apple, Microsoft, Amazon, Alphabet and Facebook now represent more than a fifth of the S&P 500. Not since the 1980s have the biggest five companies had such a large share of the index, according to S&P Dow Jones Indices.

This concentration was further strengthened on Friday when Apple, Amazon and Alphabet, Google's parent company, continued their steady march towards recent stock market highs, following bumper earnings on Thursday.

The strong share price performance came in the same week top executives from these and other tech giants were pressed by US lawmakers about the darker practices that have helped them to dominate their industries. One such critique has been their aggressive acquisition strategy of buying up smaller rivals. In a 2012 email, Facebook chief executive Mark Zuckerberg acknowledged he planned to acquire the photo app Instagram in order to "neutralise" it.

Elizabeth Warren, the US senator from Massachusetts and former Democratic presidential hopeful, said "Big Tech thinks they're too big to be held accountable — and with gutless antitrust enforcement, they are", in a Twitter post.

Yet criticism has done little harm. The strong showing in the stock market this year has recast the tech giants as defensive corners in equities through the global pandemic, helping the S&P 500 erase its losses for 2020 so far. The S&P 500 would be down 5 per cent if it did not include those stocks.

The greater sway over the market has come with a risk. When the shares in these top five companies decline, it can squash the gains from an otherwise robust broader market. On one trading day last month, almost three-quarters of companies in the S&P 500 posted a gain, but the index rose just 0.2 per cent, weighed down by all the top five stocks losing value on the day.

The S&P 500 is one of the most widely referenced indices in the US stock market and is used as a benchmark for more than $11tn in assets, according to S&P estimates. This amount has increased over the past decade as passive investing has attracted more investors to buy up funds that track popular indices.

"There is concentration risk for investors who have been holding an index fund for a long time because they are overweight with those names and in technology stocks in particular," said Liz Young, director of market strategy for BNY Mellon Investment Management.

The surging stock prices for the top five groups has helped to push the forward 12-month price/earnings ratio for the S&P 500 above 25 for the first time since September 2000, during the dotcom boom.

Jonathan Golub, chief US equity strategist for Credit Suisse, said the big tech groups were on pace to make as much as 90 per cent of the earnings they achieved in 2019 — a sign of resilience as profits across the market crater. "While they're not expected to be equal to last year, those earnings are still quite healthy," he said.

Corporate profits for companies across the S&P 500 fell by a third in the second quarter, according to Refinitiv estimates based on results from about half the index that have reported for the period.

Apple, Microsoft and Amazon are also among the most popular stocks held by users of Robinhood, one of the retail trading platforms that have had a surge in activity this year, drawing in new everyday investors to take part in the stock market rally that began in March.

"Clearly some of these valuations for growth stocks have gotten to very high levels," said Andrew Slimmon, senior portfolio manager for Morgan Stanley Investment Management. "The differential for value stocks and growth stocks is so extreme — you have to wonder if they are being pushed by speculation".

© Financial Times