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Flexing Tech Muscle

My son played his first soccer game over the weekend. He's playing under 9's for a local club. It was so amazing for me to watch his first game. I had a smile on my face for the entire 40 minutes. Not all the parents shared this feeling. There was a lot of criticism from the sidelines. For the avoidance of any doubt, this was not the EPL, it was an under 9's team who is playing together for the first time. The good news is they're learning, they will continue to improve, and they had a lot of fun. The bad news is that they got smashed, 10 to 1, or something like that. It doesn't matter. What happened, happened.


There are so many things parents can control from the sideline. Their perspective, their emotions, and the way they support their children just to name a few. They cannot control the game. They cannot control the players. They cannot control the outcome.


I also have some good news and some bad news for stock market investors. The good news is that the S&P 500 is up 20%+ since October 12, 2022 (see chart below), which is widely viewed as the definition of a bull market.

During this same time, the Nasdaq is up over 34%, bringing the return for those who invested at the absolute peak on 3 January 2022, to a mere loss of -11.96% since.

The bad news (so we're being told) is that the lion's share of the broader stock market's increase (S&P 500) is due to the surging price of a few of the largest companies.


The big five that are largely responsible for the majority of the stock market's performance so far this year are Apple (up 45% this year), Microsoft (36%), Alphabet (37%), Amazon (44%), and current stock market poster child Nvidia, which has surged 171% on AI-related excitement.


Without these stocks, the overall market would be up just +3.9% this year. If you then remove the contributions from the two largest tech companies - Meta (up 113% in 2023) and Tesla (126%) — the S&P 500 would be broadly flat, up +1.2% in fact.


To put a bit of color on the picture, I decided to chart these numbers for you. In blue, you can see the performance of the top five stocks, Amazon, Apple, Alphabet (Google), Microsoft, and Nvidia, absolutely leading the charge this year. You can see the S&P 500 (broad market) in red up about 11.9%, the S&P 500 minus the top five stocks in the green, and the S&P 500 minus not only the top five but also Meta and Tesla in orange, holding it's a head above water (up +1.2%).


To say the entire stock market is being held up by just five stocks is just not true. I added the Nasdaq 100 Equal Weighted Index, which shows a solid +16% for the year, which tells me the performance is much broader than the top five, albeit it's very tech-heavy.

Falling inflation, solid economic growth, and a good old stock (tech) market hype is what's driving these stocks. This time it's mostly about AI, although we have seen some solid earnings from the likes of Apple and Amazon. Market commentators and gurus see this dominance of a few as a warning sign that the market as a whole isn't actually doing that well — and of how vulnerable it is to any weaknesses in these five. If we look back in history, it's not unusual for a small number of companies to be outsized drivers of the stock market's gain:

A few years ago it was the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google — as Alphabet was then known).

  • In the late 1990s, the "Four Horsemen" — Microsoft, Cisco, Oracle, and Intel — led the market's charge, and

  • In the late 1960s and early 1970s, it was the fast-growing "Nifty Fifty."

Of course, this is going to happen. When you analyze market-weighted indexes (such as the S&P 500), those stocks with the biggest market caps are going to have the biggest impact on how the overall index moves. Market cap indexes get a lot of flak, primarily from active money managers who argue that you don't want to be buying more of the stock that's going up. Yet here we are. Like the parents on the sidelines, you can yell and scream as loud and for as long as you want. The result at the end of the match is going to be what it's going to be. And for market cap-weighted indexes, the results have been consistently good, and for long periods of time. Like no one knows when that one goal is going to be scored, and by whom, no one knows which stock is going to pop and when. Building a well-rounded team that plays different roles is as important in sport as it is in investing. Have a process, believe in and trust the process, and play the long game.


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