American’s tech giants have caught the public’s attention as of late.
Four of the Big Five recently appeared in front of U.S. Congress to discuss their anti-competitive business practices and privacy concerns.
Yet business is booming. Compared to the traditional economy, Big Tech operates within an intangible realm of business. This enables them to move faster, cheaper, and more profitably—with business models that possess widespread scale via the internet.
The above five charts are a reflection of Big Tech’s momentum and the significant role they have played in the swift and vigorous market recovery. Let’s take a closer look at the data.
| Company | Market Capitalization (In Billions) | Weighting in the S&P 500 Index |
|---|---|---|
| Apple | $1,930 | 7.1% |
| Microsoft | $1,590 | 5.9% |
| Amazon | $1,590 | 5.9% |
| Alphabet | $1,030 | 3.8% |
| $742 | 2.7% | |
| Total | $6,883 | 25.41% |
| S&P 500 | $27,050 | 100% |
Not All Stocks Are Created Equal
Of the 505 stocks that make up the S&P 500 Index, only about a third have experienced positive returns year-to-date (YTD), with the remaining stocks in the red.
Despite the majority of companies underperforming, the S&P 500 has generated a positive year-to-date return. This is due to the fact that companies are weighted according to market capitalization. For example, the Big Five now represent 25% of the index, despite being just five of the 505 stocks listed.
Big Tech’s dominance is being driven by ballooning market valuations. For instance, Apple reached the $1 trillion valuation in August 2018, and now the company is awfully close to topping the $2 trillion mark after just two years. This is just one of many examples that illustrate the growing power of Big Tech.
Pandemic Proof?
The five Big Tech companies are also seeing business as usual, with revenues in the first half of the year growing steadily compared to the first half of 2019.
| Company | YTD Price Returns | Revenue Growth (H1 2020 vs. 2019) |
|---|---|---|
| Apple | 52% | 6% |
| Microsoft | 31% | 14% |
| Amazon | 68% | 34% |
| 24% | 14% | |
| Alphabet | 11% | 6% |
| S&P 500 | 4.5% |
Their respective stock prices have followed suit, adding to the divergence between the performance of tech and the overall S&P 500 Index.
The equal-weighted S&P 500 Index provides diversification, but it has underperformed recently. Year-to-date, the equal-weighted index is down -3.5% relative to the positive 4.5% seen for the S&P 500, a spread of 8%. The combination of Big Tech’s outperformance and large weighting is likely behind the index staying afloat.
Dissecting the Disconnect
You may notice the phrase “stock market disconnect” reverberating recently, reflecting consumer views on the state of financial markets and their relationship with the economy, or lack thereof. While the economy combats record levels of unemployment and a plethora of bankruptcies, major American indexes edge closer to record highs.
This disconnect can be explained by the market capitalization weighted qualities of these indexes as well as the geographic source of company revenues in the S&P 500.
The most visible businesses to the everyday individual represent a small and vulnerable basket of companies that account for a undersized component of the stock market. No matter how clobbered they get, their effects on the market as a whole are miniscule.
A Global Footprint
In the era of globalization, American companies are more diversified than ever. Their revenue streams carry a greater global presence, meaning domestic revenues in the United States are less crucial than in times past. For example, the S&P 500’s foreign revenue exposure stands at 42.9% in 2018 and these figures are even higher for Big Tech stocks.
| Revenues Recognized Outside of North America/America | |
|---|---|
| Apple | 55% |
| Microsoft | 41% |
| Amazon | 31% |
| Alphabet | 51% |
| 54% | |
| Average | 46% |
Big Tech has outdone itself by virtually any measure.
They’ve shown their capacity to translate headwinds to tailwinds, even under challenging economic circumstances. Going forward, estimates by analysts on Wall Street suggest that even more growth for these companies could be on the horizon.