Apple; Microsoft; Amazon; Facebook; Alphabet: Will The S&P500 Be This type of Great Index Without These Tech Stocks?

In recent months, there has been increased curiosity about the topic of investing, from both very seasoned investors who've weathered numerous market crashes and even the less experienced investors with limited knowledge.

Why it has been the case? The wild swings in market prices, because of COVID-19-led uncertainties, have been of a historic magnitude, capturing the collective attention of everyone.

In the middle of February, we saw a long running bull market in the history of the stock market come to an end. We then witnessed the fastest ever 20% decline ever to enter a bear market within 16 days. Next, we emerged into a new bull market just a short few weeks after that – surpassing post COVID-19 highs even as pandemic and geopolitical uncertainties continue.

In Singapore, the majority of this holds true as well – except that we have not recovered to our pre-COVID-19 levels at this time.

5 Biggest Technology Companies On The S&P500

Forming the largest sector on the S&P500, technology companies make up 28.7% of the index. 5 biggest stocks on the S&P500 are also all technology stocks: Apple, Microsoft, Amazon, Facebook and Alphabet.

While the majority of us are familiar with the acronym FAANG, it's Microsoft rather than Netflix – which contributes the N in FAANG – which we should be more aware of. Today, Netflix has a market capitalisation of US$227.6 billion, while Microsoft has a market capitalisation of US$1.6 trillion, or nearly seven times larger than Netflix.

These key stats provides you with a better idea of the magnitude of the five biggest stocks on the S&P500.

Technology Companies' Impact In The S&P500 Index

Despite COVID-19-led market crash within the February to March 2021 period, the S&P500 is trading above pre-COVID-19 levels – near its all-time highs.

If we look at the chart below, we can see that all five tech stocks beat the S&P 500 performance within the year-to-date. It isn't by a small margin either.

Here would be the returns for each of them:

S&P 500 – 6.9%
Apple – 64.7%
Microsoft – 37.8%
Amazon – 82.3%
Alphabet – 22.8%
Facebook – 41.84%

The returns from the big five technology stocks dwarf the already respectable returns achieved by S&P 500 index. Given such a disparity in returns which these five technology stocks also contribute the largest weightage to the S&P 500 index, it's fair to say the S&P 500 returns could be very mediocre without them.

Goldman Sachs Investment Research wrote concerning the returns the S&P 500 index might have achieved with and without the five biggest tech stocks, and compared it with the five biggest tech stocks alone. The results are exactly what we would have expected – not great at all.

This graph was plotted a couple weeks ago, but it gives us a great indication of the divergence in the fate from the top five companies on the S&P 500 index (+35%), when compared to remaining 495 companies on the S&P 500 index (-5%).

Should You Steer clear of the S&P 500 Index?

It would be na”ive to say that we should avoid investing in the S&P 500 index due to this. The fact is that it is a diversified index, exposed to some of the biggest and best quality companies remains.

The fact also remains the five biggest technology information mill showing no signs of a let up, therefore it may be a risk in itself to remove it from our portfolio.

What you should be aware of, is that the performance from the S&P 500 index, and perhaps the global stock market, is dependent on these big five stocks performing well. When we truly believe in any of the other 495 companies on the S&P 500 index, we may also want to allocate an investment into those stocks on its own.

In the same token, if we are invested in the S&P 500 index, the risk of our portfolio may be increasingly concentrated during these big five stocks. We cannot ignore the fact that any failure within the big five tech stocks might have repercussions on the performance of the other 495 stocks that are already lagging quite some way behind.