There has been tremendous focus on how significant a small number of stocks were to the S&P 500‘s nearly 29% total return in 2021.
Perhaps this typifies sour grapes, as most active managers underperformed the S&P 500 last year. Witnessing the top contributors — Apple, Microsoft, Google, Tesla, and Nvidia — soar higher was like watching a speeding train whose destination you desperately want to reach. Instead, you merely chug behind at a slower pace due to fear that the leaders might crash soon after you jump onboard.
Apple and its band of four giants were up an average of 65% last year, more than double the index’s return, and responsible for 31% of the S&P’s return last year.
While it might be fascinating to look at one year in isolation, it’s more useful to study whether this level of concentration is habitual or extreme. We looked at the past 15 years of returns, analyzing the data around the top contributors each year and their impact on the total market.
We excluded 2018 and 2008 because they were negative years, which distorts the numbers, applying huge contributions to the 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 illustrates, there was only one year, 2020, in which the top five had a larger impact on the overall market’s return than in 2021, an astounding 62% versus 31%. Those names — AAPL, AMZN, MSFT, NVDA, and FB — were among the largest Covid beneficiaries, whose earnings and growth accelerated well beyond Wall Street expectations.
Despite the strength of the “reopening trade,” 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 nine out of the 10 years shown above. Clearly, when the largest public companies dramatically outperform the market, as they did in many of the past 15 years, their increasing heft literally carries more weight in the following year. Apple doubled its market capitalization from early June 2020 to its current $2.8 trillion, which is now about 6.8% of the index. Microsoft made a similar ascent in under two years: It’s now 6% of the S&P 500. Size matters in the contribution game.
In addition, with interest rates as low as they have been, the fixed income alternative to equities is much less compelling, so billions pouring into S&P index funds naturally raises the value of its largest constituents. When the “Trillion-Dollar Club,” including AAPL, MSFT, AMZN, TSLA, GOOGL, and almost FB, have strong years, investors will have difficulty beating the averages.
However, the last two years appear to be an anomaly, considering that the contribution to the S&P index from the top five stocks, in all the other years cited above, ranged from 9% to 24%, compared to 31% and 62% in 2021 and 2020 respectively.
The pandemic has been life-altering in multiple ways, but Covid’s effect on investors was dramatic. Only the rapid sell-off in February 2020 felt appropriately disquieted by a global shutdown: the subsequent new-high-setting rebound in roughly six months, the GameStop/AMC Entertainment retail-fueled meme jubilation in early 2021, and the 70 S&P record closes through the year have felt slightly surreal.
Nvidia is the sole equity that appeared in both the top five and top fifteen absolute price winners in the S&P last year, suggesting that what makes it difficult to beat the index isn’t the lack of a cohort of outperformers, but the power of return plus weight.
Mega caps have enjoyed almost two years of price/earnings multiple expansion, much of it deserved because of accelerated adoption of their platforms and super-charged earnings growth. We are less likely to experience that level of investor enthusiasm for these same names in the next two years.
So far, 2022 is not the same runaway train of top-tier darlings that we experienced in the prior two years. Historical data would suggest that the most heavily capitalized companies may not dominate performance for the third year in a row. The train has left the station. We’ll see if it becomes a mistake not to be fully on board.
Karen Firestone is chairman, CEO, and co-founder of Aureus Asset Management, an investment firm dedicated to providing contemporary asset management to families, individuals and institutions.