Losses in US tech stocks extended into the early days of 2023, with warnings of more pain to come for market titans including electric car maker Tesla.
The 10 largest stocks by market capitalization in the S&P 500 index at the start of 2022, including Tesla, Apple and Microsoft, lost a combined $4.9tn. So far in 2023, the market capitalization of these companies has fallen by another $110 billion.
Mega-cap stocks dominate Wall Street equities, with the top 10 stocks holding more than 30 percent of the S&P 500 near the market’s peak in late 2021. Now this pullback points to a market in which there is such a heavy weighting. will start.
“There is some de-concentration but it is very little compared to what has been done,” said Tatjana Puhan, deputy chief investment officer at TOBAM, a Paris-based asset manager. “We are at the beginning of this, we are not close to the end yet.”
On average over the past two decades, the top 10 stocks accounted for about a fifth of the S&P 500 and the top five, about 13 percent. But the concentration has increased. At the peak of 2020, the top five accounted for 22 percent. In December of last year it eased slightly, but the big five — Apple, Microsoft, Amazon, Google parent Alphabet and Warren Buffett’s Berkshire Hathaway — still accounted for 17 percent, according to Bloomberg.
The decline in some of these stocks has largely outpaced declines in the broader market. The S&P 500 is down 19 percent in 2022. Meanwhile, Tesla lost nearly two-thirds of its value last year and dropped out of the top 10 of the index. This year it dropped another 10 percent.
The dominance of mega-cap stocks strengthened as they soared in the wake of the global Covid-19 outbreak. Index-tracking funds had to buy them to keep up with broad market benchmarks. But it is working in reverse, now that the big names are suffering from various problems.
Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, noted that many fund managers have been late to the mega-cap trend because they were reluctant to take so much risk on such a small group of companies.
“Last year was a stock market,” she said, noting that three-fifths of the S&P 500 outperformed the index, allowing it to be dragged down by its biggest constituents to its worst loss in 14 years. “There may still be more pain in the mega-caps as we haven’t seen a sell-off among active managers,” she added.
The eras of concentration are not new – they have been formed during other booms, such as the dotcom bubble that burst in 2000 and the “nineties” household names that became famous in the late 1960s.
The current one, however, is still more intense, with off-market values far smaller than previous rally peaks. It took 253 of the smaller members of the S&P 500 in 2000 to match the size of its top five, Puhan calculates. Today it holds 456.
Others view the comparison problem as part of a broader battle between fast-growing and often overpriced stocks and less attractive stocks sought for their continued profits and dividends, collectively known as “value.” Many Wall Street juggernauts fell into the first category and rallied massively in 2020 and 2021 when extremely low borrowing costs sent traders in search of returns. That trend reversed sharply in 2022 when central banks raised interest rates, and so far in 2023, many of these stocks have continued to fall.
“It’s very reminiscent of the tech boom, when people saw tech stocks crash — and then they crashed again and again,” said Rob Arnott of Research Affiliates, an asset manager.
The S&P 500 and its predecessors have produced trailing calendar-year losses only four times in a history stretching back to 1928, but one of those periods followed the dotcom bubble, when the benchmark fell for three straight years.
Arnott pointed to Tesla as an example of still-high valuations among mega-caps suggesting more sales to come. Despite its collapse last year, the electric vehicle giant still has a market capitalization of about $350 billion, or 21 times its forecast earnings. By contrast, Toyota’s $225 billion, the world’s largest carmaker, is eight times its expected earnings.
“The value has decreased [until recently] not because companies were doing bad, but because they were losing and getting cheap,” he said. “I look at it as two years out of five to seven years of value gains — and that’s just bringing us back to the norm. historical”.