The strong concentration of the US stock market in a handful of stocks has raised concerns that a fall in their stock prices could lead the broader market into a downward spiral.
Five tech giants – Amazon, Alphabet, Apple, Facebook and Microsoft – make up between a fifth and a quarter of the leading US blue chip index, the S&P 500.
Due to their dominance, the fall in their stock prices has weighed in on the S&P 500 in recent days, although stocks of hundreds of other companies have increased.
US stock markets were dragged lower due to a decline in the shares of technology companies
Only Apple, valued at about $ 1.6 trillion, is now worth 80 percent of the FTSE 100’s total market cap, which is about £ 1.57 trillion – or $ 2 trillion. While Amazon and Apple together are 50 percent larger than the UK index.
After years of tremendous price gains, many technology companies have continued to grow in recent months thanks to the corona virus pandemic. Amazon performed best this year, up 62 percent so far this year.
But there is a fear that if the boom in tech stocks went extinct, they’d drag the market with them.
Shares on Facebook fell another 0.8 percent yesterday, while Apple fell 0.25 percent, Microsoft 0.6 percent, and Google’s mom Alphabet 0.6 percent, while Amazon rose 0.75 percent.
The S&P 500 index closed 20 points or 0.62 percent lower at 3,215.6.
The US big five tech giants – Amazon, Alphabet, Apple, Facebook and Microsoft – make up between a fifth and a quarter of the US bluechip index, the S&P 500
Neil Wilson, an analyst at Markets.com, says the Nasdaq – which most tech companies are listed on – suggests investors are already curtailing their exposure to such stocks.
“The recent moves in the Nasdaq indicate that investors are narrowing their exposure to these big tech names, so earnings will be critical in determining where we go on Wall Street.”
The Nasdaq fell 97 points or 0.9 percent to 10,483 yesterday.
How does the FTSE 100 index compare?
The Footsie is no stranger to investors who also show a high degree of concentration with big names.
Unilever, AstraZeneca, BHP Group, Royal Dutch Shell and Rio Tinto account for 30 percent of the Footsie’s market cap of $ 2.17 trillion (£ 1.70 trillion), or about £ 510 billion.
When drug giant GlaxoSmithKline is added to the list, the six make up 35 percent of the index.
Unilever, AstraZeneca, BHP Group, Royal Dutch Shell and Rio Tinto account for 30 percent of the Footsie’s market cap of $ 2.17 trillion (£ 1.70 trillion) (Source: Reuters Eikon, July 24)
The market capitalization of these top six companies in the UK, at around £ 590 billion, is almost the same as the following 15 top companies listed on the Footsie, which have a combined market capitalization of around £ 600 billion.
As with the US stock markets, large fluctuations in the price movements of the largest companies through market valuation can have a major impact on the total market. The index fell 1.4 percent yesterday to 6,123.8.
But Wilson says the difference between the S&P 500 and FTSE 100 is that the latter is concentrated across different sectors, not just technology.
“The good news for the FTSE 100 is that it is concentrated in a much more diverse range of equity sectors than just technology,” said Wilson.
“These are generally more defensive stocks, too.”
Shares in drug giant AstraZeneca are about 15 percent higher in the year so far, and the company has recently been spurred by promising results from human trials of a coronavirus vaccine it is developing in conjunction with Oxford University.
Consumer giant Unilever is up 7 percent this year, with the company behind Domestos benefiting from the rising demand for cleaning products during the pandemic.
But oil giant Shell is underperforming, with stocks falling 45 percent since January, mainly due to a sharp drop in oil prices. Rival BP has also lost 37 percent of its value.
Banking giant HSBC has also dropped 38 percent this year, while Lloyds is down some 50 percent.
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