On the last day of the busiest earnings week in a decade, here is a striking statistic from Goldman Sachs, showing just how dominant a handful of large cap companies have become in terms of both overall profitability and market impact:
Year to date the top 10 contributors have combined to account for 37% of the S&P 500 index return (more than double their market cap representation of 17%). The concentration among the top five is even greater, with those firms – AAPL, FB, AMZN, GOOGL, and MSFT – accounting for 28% of the return and 12% of market cap.
Some further perspective, courtesy of the WSJ, which notes that the combined market capitalization of AMZN, MSFT, INTC and GOOG makes up about 8% of the Index’s total.
Throwing in Apple and Facebook puts about 13% of the S&P 500’s combined market cap into the hands of just six companies. This wasn’t always the case. Ten years ago, Apple, Amazon, Google, Microsoft and Intel made up just 5% of the S&P 500’s market cap, while Facebook was four years away from becoming a public company.
Can this tremendous tech rally persist? The WSJ's take:
The newfound prominence of big tech companies now can be chalked up to a few factors. One is that most big tech companies are profit machines—unlike many of their smaller peers that are still losing money. Alphabet, Microsoft, Intel and Amazon reported a combined $16.8 billion in operating income for the March quarter on Thursday. That is about 7% of the total projected for the S&P 500. Amazon looks like an outlier with a rather thin operating margin of 2.8% for the quarter, but even that is a notable gain from its average of just 1.5% over the last five years.
But the other, even bigger factor is that demand for technology products and services keeps increasing, even as some market segments like PCs have declined. That has allowed several big tech companies to pivot into new segments with the help of strong cash flows generated by their original businesses. Amazon, Microsoft and Google have built large cloud services used by businesses shifting from more traditional computing setups.
Those efforts are still relatively young. Revenue from Amazon’s AWS cloud business surged 43% to $3.7 billion for the March quarter, but is still only about 10% of the company’s overall business. The segment of Alphabet that includes Google Cloud saw revenue jump 49% year over year, but is only about 1% of the company’s total. That leaves a lot of potential upside for a small group of big players that already have demonstrated that scale matters.
Perhaps these megacaps should also dedicate a substantial portion of their cash to a simpler project: defense against monopoly accusations, because this is certainly not the first time in US history when just a handful of companies have dominated the overall market. And with AAPL, AMZN and GOOGL all racing to be the world's first trillion dollar company, it won't be the last either.
In the meantime however, the big question is how long until Jeff Bezos surpasses Bill Gates as the world's richest man. At this rate, less than a week of buying in AMZN shares should be sufficient.