For a moment last week, before a sharp sell-off in tech shares, the stock market value of Apple sat above that of the entire Russell 2000 index of smaller listed American companies, in a stark example of how the US equity market had become increasingly lopsided.
Apple’s market capitalisation touched a peak of $2.29tn, passing the market value of the Russell 2000 last Tuesday, as investors rushed to buy the stocks of big technology companies. The five biggest members of the blue-chip S&P 500 index are now all from the tech sector, with Apple, Amazon, Microsoft, Alphabet and Facebook worth almost $8tn combined.
But the US stock market’s top-heaviness has worried some analysts. The top five companies trade at about 44 times their expected 12-month earnings, close to the 50 times price-to-earnings ratio of the five biggest stocks during the height of the dotcom bubble peak, according to Oxford Economics.
It means a setback in the valuations of this quintet could have far-reaching implications, as displayed last week when a tumble in tech shares on Thursday dragged the entire S&P 500 down 3.5 per cent in the benchmark’s worst day since June.
“US equity indices have become extremely concentrated,” Daniel Grosvenor, director of equity strategy at Oxford Economics, said in a note. “These stocks are also highly correlated — much more so than in the past — which reduces index diversification benefits and means any reversal in their fortunes would weigh heavily on the overall market.”
Historically, the stocks of smaller listed companies have delivered better returns than their bigger peers, thanks to their greater growth rates. However, while the S&P 500 has climbed more than 6 per cent this year, despite the Covid-19 pandemic, the Russell 2000 small-caps index remains down more than 7 per cent. That has crimped the overall market capitalisation of its 2000 members to $2.27tn.
That just one US company could have a stock market value greater than the entire Russell 2000 underscores how the coronavirus crisis has exacerbated a decade-long trend of bigger companies becoming larger while smaller ones languish. Over the past decade, the large-cap S&P 500 has climbed 217 per cent, while the Russell 2000 has gained 147 per cent.
Even within the large-caps of the S&P 500 there is a widening gulf between the “mega caps” and the rest. In August the 50 biggest constituents gained almost 10 per cent, compared to under 4 per cent for the rest of the index. That was the narrowest monthly rally since 2002, according to Bank of America.