Apple Inc. (NASDAQ: AAPL and Microsoft Corp. (NASDAQ: MSFT), the unrivaled powerhouses of the corporate world, are now exerting an unprecedented level of influence over the prestigious S&P 500 Index (NYSE: SPY), triggering concerns among investors regarding the index's increasingly top-heavy composition.
So far this year, Apple and Microsoft have collectively added over $1 trillion in market value, accounting for nearly half of the S&P 500's gains.
The combined weight of these two tech giants in the benchmark reached an all-time high of 14% last month. This surge comes on the heels of robust earnings reports, particularly from Microsoft, which ignited a remarkable rally in technology stocks. The dominance of these industry behemoths becomes even more apparent when considering the inclusion of other tech titans such as Alphabet Inc. (NASDAQ: GOOGL), Amazon.com Inc. (NASDAQ: AMZN), Meta Platforms Inc. (NASDAQ: META) and Nvidia Corp. (NASDAQ: NVDA).
Nearly a quarter of every dollar invested in the S&P 500 is now allocated among these six corporate giants, highlighting the immense concentration of wealth and power within a select few names.
This shift in the index's composition raises concerns about potential vulnerabilities and risks associated with such an overwhelming influence exerted by a handful of companies. Investors are increasingly on edge, wary of the implications of this top-heavy nature and its potential impact on market dynamics and diversification.
The concentration of these few names, all operating within the tech and communication services sectors, is troubling for Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management.
"It's concerning to have such concentration in a few names, and all those companies are in the very similar tech and communication services sectors," Landsberg told Bloomberg. "This concentration will drive broader market performance until it doesn't."
Tejas Dessai, an analyst at Global X ETFs, warns that the increasing influence of Big Tech in major indexes exposes passive investors to the risk of overexposure. But he added that it helps that these businesses are some of the most innovative names in the technology world and none are facing a decline anytime soon.
Investing Against the Grain
While technology and internet giants have long dominated the benchmark index, their influence was diminished in 2022 because of rising interest rates and slowing growth, resulting in declining valuations. But their outperformance this year relative to the market capitalization-weighted index has restored their standing and influence.
These tech giants have benefited from investors seeking the perceived safety of their cash-rich balance sheets amid banking turbulence.
Thanks to changes in federal law, investors looking to break away from the increasing tech Oligarchy have options. Instead of investing in a small handful of companies producing lackluster gains, platforms like StartEngine allow anyone to invest in startups and pre-IPO opportunities, including investing StartEngine itself. This means investors can invest in companies on their rise to an IPO, then let the market forces work for them if or when the company hits the stock market.
The stock gains are driving valuations to what Landsberg considers extreme levels. Amazon, trading at 38 times projected earnings, leads the pack, followed by Microsoft at 28 times and Apple at 27 times forward earnings. Alphabet and Meta have relatively lower valuations, trading below 20 times forward earnings, but they are catching up quickly.
As the influence of these companies continues to grow within the index, unease is mounting among some investors. Dave Grecsek, managing director of investment strategy and research at Aspiriant LLC, emphasizes the escalating risk, saying the higher the concentration at the top, the greater the risk for investors.