The 5 Companies that Make the Market Go Up or Down

The origins of the phrase “what’s up?” date to the mid-nineteenth century, with attributions of the expression being used as far back as 1813 in English works of fiction. It subsequently has made its way into the slang of Bugs Bunny and even a 1999 Super Bowl ad from Budweiser.

On Wall Street and in the financial sector, the question may garner a response of an individual sector, or an individual asset class, on any given day. Though investors gauge the market as being up or down based on index measurements, when combing through the weighting of the Nasdaq 100 and S&P 500, the same five companies – Apple, Microsoft, Alphabet, Amazon, and Tesla – make up a large portion of the weighting and drive the overall bulk of the movement within the two indexes.

Though there are many potential criticisms to be made about the oblique corporate and bargaining power these huge companies wield, the performance of the Nasdaq year-to-date, -33.5%, against its equally weighted portfolio’s performance of -29.3%, and the S&P 500 performance year-to-date of -24.7% against the equally weighted S&P 500’s performance of -20.4%, depicts that it is not always the thoroughbreds that win the race.

Adam Hetts, global head of portfolio construction and strategy at Janus Henderson Investors, told Markets Group equal-weight outperformance occurs despite the sheer institutional power these companies hold. “The capitalization-weighted approach is currently characterized by concentration,” he said. “Equal-weighted versions of the indexes give investors access to more cyclical sectors, which can make a lot of sense in today’s climate.”

“Equal-weighted portfolios,” Hetts continued, “typically have higher exposure to sectors like materials, which have been beneficiaries of the inflationary environment. REITs exposure is another advantage of equal-weighted portfolios, historically REITs also benefit from inflation and diversify the tech sector, dating back to the late 1990s tech crash.”

The S&P 500 is configured using a capitalization weighted methodology. Due to this configuration, it can partially become an index that tracks momentum in the underlying 500 tickers as they advance or decline in market capitalization. Furthermore, these five tech companies are the five largest domestic companies by market cap, with Apple valued at $2.25 trillion, Microsoft at $1.7 trillion, Alphabet at $1.28 trillion, Amazon at $1.14 trillion, and Tesla at $697.5 billion.

Apple makes up the largest holding of the S&P 500 at 6.92% of the allocation, followed by Microsoft at 5.71%, Alphabet at 3.68%, Amazon at 3.32%, and Tesla at 1.94%. In total the five companies account for just over a fifth of the apportionment. Hetts quipped, “this has worked for investors because, to reference Warren Buffet, while diversification may preserve wealth, concentration builds wealth over time.”

The Nasdaq is weighted on a modified cap-weighted basis, designed to measure the performance of the 100 largest Nasdaq listed non-financial companies. The highest allocation is also Apple at 13.4%, trailed by Microsoft at 10.2%, Alphabet (7.175%), Amazon (6.95%), and Tesla (4.125%). In total, the five companies make up 41.85% of the Nasdaq 100. The Nasdaq is often referred to as the gauge of how technology companies are performing.

Hetts tackled this convention saying “the issue of concentration comes up often, since not only are U.S. equities inherently overweight with technology and growth, typical asset allocations, being overweight U.S. at the expense of international equities, are exacerbating that tech overweight. When U.S. technology and growth essentially became a flight to safety in the COVID-era, it reinforced the concentration most investors have in this short list of large growth companies.”

The allocation in these names should not be surprising as each of these technology companies are household names and behemoths in business. Hetts on the success of these tech offerings said, “it’s been an unprecedented cycle for tech, and these tech giants have been huge winners and become dominant within the indices.”

On the Fortune 500 list, Amazon ranked second in 2022 with revenues of $469.8 billion and 1.6 million employees. Apple ranked third with $365.8 billion in revenues and 154,000 employees. Alphabet ranked eighth with $257.6 billion in revenues and 156,500 employees. Microsoft ranked 14^th with $168.1 billion in sales and 181,000 employees. The outlier of the group, Tesla, ranked 65^th with $53.8 billion in revenue and 99,290 employees. Tesla grew sales by 70% from 2020 to 2021.

Though these financial statistics are impressive over the course of passing decades, America’s biggest companies have a habit of changing seats at the proverbial table. Dina Ting, head of global index portfolio management, Franklin Templeton ETFs, discussed with Markets Group how America’s most powerful companies change over time, saying “historically, the top companies making up the indices have shifted, reflecting the relative performance of constituents. Companies that have outperformed the universe, began taking on a larger share of the indexes over time. Just over a decade ago, Apple usurped Exxon’s reign as the S&P 500’s most valuable publicly traded company, followed by GE, Chevron and IBM. Exxon reclaimed the top spot a year later only to swap rankings with Apple once again just months later. By then, Johnson & Johnson made it to number three, and Google still hadn’t edged up into the Top 5.”

The position of being perched atop the mountain comes with heightened oversight. Alphabet and Amazon have been hurled into whispers of anti-trust moves on Big Tech. Microsoft historically had been subject of an anti-trust case back in 2001. While Hetts declined to give any specific outlook on the five super companies, he did comment that after a year of tough sledding, technology stocks may be ready to turn the corner in this bear market saying, “during the pandemic the tech sector pulled forward years of demand, in addition high excess liquidity drove attraction to lower-quality companies, which was historically anomalous. Now that we’ve seen lower liquidity and rising rates drive historic losses, [it] might be an attractive entry point, but dispersion of performance may continue to be high within the sector.”

Hetts disclosed, “quality within tech might be a key driver of that dispersion, where we like the virtuous flywheel of high-quality tech companies with higher earnings fueling dependable cash flows and some of the highest research & development budgets in the world, whereas the lower-quality technology companies whose valuations were built up with the inflows of cheap financing provided by near-zero rates, may falter.”

MAGAT, perhaps a poorly formed acronym for the bundle of companies, are the five biggest companies by market capitalization domestically, so it should not be a surprise that the cap-weighted indexes allocate towards the five with such concentration. The success of these five companies, or rather the continued growth in their market capitalizations, can broadly dictate whether the market is up or down.