#337
Top-Heavy

The top five stocks (FAANG) now make up over 20% of the S&P 500 index, and over 40% of the Nasdaq 100. This is double the concentration at the height of the dot-com bubble as certain industries are severely impacted by the pandemic including energy, retail, and travel.

While it is not unprecedented for companies to dominate the S&P 500 (Exxon, IBM, AT&T), this time (aka Corona time) is marked by new companies quickly rising up through the ranks. Zoom now has a market cap of $50b (from an IPO valuation of $10b a year ago) and is worth more than the entire U.S. airline industry!

The S&P 500 was created in 1957 and today only 60 of the original 500 members remain. As original members have dwindled, so has the average tenure of companies in the index. In 1964, the average index tenure of an S&P 500 company was 33 years. In 2016 the tenure declined to 24 years and is expected to shrink to 12 years.

Once a quarter, the index committee determines any changes to the list of companies. To be allowed entry into the S&P 500 today, a company must have a market cap of at least $8.2b, sufficient liquidity, and consistent profitability. 30 underperforming companies may be on the chopping block this quarter, which is greater than the annual average over the last three decades and would be one of the busiest years.

With some dropping out, the committee will have to add names to the index (with the risk of including too many tech companies) which typically sends the stock up by 4-7% as passive funds pour into the stocks.

While the S&P 500 currently encompasses roughly 80% of the entire US stock market and nearly $10t in assets is benchmarked or directly linked to it, it is fair to say that, like this gentlemen’s ride, it is top-heavy.