Much attention has been paid to how important a small number of stocks were to the S&P 500’s nearly 29% total return in 2021.
Perhaps it epitomizes sour grapes, as most active managers underperformed the S&P 500 last year. Watching the top contributors – Apple, Microsoft, Google, Tesla, and Nvidia – soar high was like watching a speeding train reach the destination you want to reach. Instead, you only slow down for fear that the leaders might crash shortly after you jump on your ship.
Apple and its band of four giants were up an average of 65% last year, more than double the index’s return, and accounted for the S&P’s 31% return last year.
While it may be tempting to look at a year in isolation, it is more useful to study whether this level of concentration is habitual or extreme. We looked at the returns for the past 15 years, analyzing the data surrounding the top contributors each year and their impact on the overall market.
We excluded 2018 and 2008 because they were negative years, which distorts the numbers, implying a huge contribution to winners relative to the overall market. This phenomenon also applies to years when the market was basically flat: 2015, 2011 and 2007.
As the table below shows, there was only one year, 2020, in which the top five had a bigger impact on the overall market return than in 2021, an astonishing 62% versus 31%. Those names – AAPL, AMZN, MSFT, NVDA, and FB – were among the biggest Covid gainers, with earnings and growth far ahead of Wall Street’s expectations.
Despite the strength of “business reopenings”, three of the 2020 names – Apple, Microsoft, and Nvidia – reappeared in 2021, thanks to both their Covid-agnostic earnings growth as well as sheer market value .
Apple and Microsoft appear in the nine out of 10 years shown above. Clearly, when the largest public companies outperform the market dramatically, as they have done over the past 15 years, their increased theft literally carries more weight in the next year. Apple doubled its market capitalization from the beginning of June 2020 to its current $2.8 trillion, which now accounts for about 6.8% of the index. Microsoft made a similar climb in less than two years: It’s now 6% of the S&P 500. Size matters in the contribution game.
Furthermore, the lower interest rates are, the less compelling the fixed income alternative to equities, so investing billions in an S&P index fund naturally increases the value of its largest components. When “trillion-dollar clubs” including AAPL, MSFT, AMZN, TSLA, GOOGL and Almost FB have strong years, investors will have a hard time beating the average.
However, there appears to be a discrepancy over the past two years, given that the contribution to the S&P index from the top five stocks, in all other years, ranged from 9% to 24%, compared to 31% and 62%. 2021 and 2020 respectively.
The pandemic is life changing in many ways, but the impact of COVID on investors was dramatic. The only rapid sell-off in February 2020 felt justifiably uneasy by a global shutdown: a new-high-setting rebound later in nearly six months, a GameStop/AMC Entertainment retail-fueled meme jubilation in early 2021, and a 70 S&P record close done. Have felt a little surreal through the years.
Nvidia is the only equity that appeared in both the top five and top fifteen absolute value winners in the S&P last year, suggesting that the index is hard to beat, lacking not a bunch of outperformers, but return power plus weight.
Mega Caps has enjoyed several expansions of value/earnings over nearly two years, most of which have been qualified by their platform’s accelerated adoption and super-charged earnings growth. Investors are less likely to experience that level of enthusiasm for the same names in the next two years.
As of now, 2022 is not the same runaway train of top-tier darlings that we experienced in the last two years. Historical data shows that the most highly capitalized companies may not dominate performance for the third year in a row. The train has left the station. We’ll see if not being completely on board turns out to be a mistake.
Karen Firestone is the President, CEO and Co-Founder of Aureus Asset Management, an investment firm dedicated to providing contemporary asset management to families, individuals and institutions.