One uncomfortable trend over the last few decades is increasing inequality. It's happening among the population as the wealthiest 1% and specifically, the top 0.1% are seeing the greatest gains in wealth and income over multiple timeframes including during the bull market from 2009 to 2020. In contrast, real incomes have not materially increased over the past 30 years, while the cost of medical care, education, and housing has significantly increased.
Inequality has manifested in the stock market as small-cap stocks have underperformed large-cap stocks to an unusual degree during this cycle. Larger companies can benefit from "regulatory capture", political influence, and low-interest rates in a way that smaller companies can't.
Big Tech's Dominance
And in the same way that there's increasing inequality within the 1% with the 0.1% pulling away, this is also happening within the S&P 500 (NYSE: SPY). The S&P 500 is weighted by market cap, and currently, the largest five stocks in the index account for 21% of the index. These five stocks are Microsoft (Nasdaq: MSFT), Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG), Amazon (Nasdaq: AMZN), and Facebook (Nasdaq: FB).
Their increasing dominance of an already elite group is breath-taking. Microsoft is the largest stock in the group with a $1.33 trillion market cap. It's larger than 180 of the smallest companies in the group combined. Apple, Amazon, and Microsoft are all in the trillion-dollar market cap club. Their combined weight is nearly equivalent to the 400 smaller companies in the index.
Despite their size, these companies have higher revenue growth than the average growth rate of the S&P 500. Additionally, they have higher margins. Typically in business, higher margins lead to more competition which causes margins to come down. However, it seems as if tech may be insulated from this dynamic.
Bigger size means economies of scale and resources to upgrade their products and focus on winning market share. More data from users and application of machine learning gives more understanding of how to continually innovating.
Risks
Many of these characteristics are in common with monopolies. In the past, the federal government has acted to break up monopolies or increase competition, and there is a growing bipartisan consensus that something needs to be done. Conservatives are fearful of the power of culturally, left-leaning companies to shape the future and especially their roles as gatekeepers of Internet content. On the left, there is a natural aversion to a concentration of power.
Another risk is simply that these companies are richly priced with high multiples. If the economic weakness persists, it will lead to decreased revenues and affect their bottom lines. Bear markets typically end with multiple compressions. This would damage the stocks with the highest multiples.