‘Concentration Risk’ In S&P 500 Has Never Been Higher

Earnings from America’s tech behemoths were widely described as “mixed” for the third quarter.

The veracity of that characterization depends on your definition of “mixed.” Yes, Amazon and Apple flagged rising costs and lost sales associated with lingering pandemic effects and supply chain disruptions, but generally speaking, the FAAMG cohort (which will need to be rechristened now that Facebook is no longer Facebook) delivered the usual compendium of unfathomably large numbers.

Simply put, it’s very difficult to conceptualize of a world in which those five companies (plus Netflix) don’t exist, and for once I’m not waxing philosophical. I don’t mean from a broad, societal perspective. Rather, I mean strictly in the context of corporate profits.

The figures (below, from Gerard Minack) are dated, but they’re among the more poignant illustrations of just how reliant the market is on a handful of names.

Late last week, Goldman’s David Kostin noted that the FAAMG companies contributed 14% to overall S&P 500 EPS in Q3. That was actually lower than the four-quarter average, which was 16%.

Earlier this year, in a sweeping summary of the overall environment for equities aimed at dispelling the notion that stocks are a bonafide bubble, the bank’s Peter Oppenheimer noted that average top line growth for FAAMG companies is around 3x the average sales growth of the rest of the market, while net income growth for the group is double the average.

The figure (below) gives you some additional, historical context.

Last week, BofA’s Michael Hartnett presented a visual showing the outperformance of US equities versus other developed market shares (i.e., ex-US) over time, with both the tech bubble and the Nifty 50 annotated. Suffice to say American exceptionalism is alive and well.

But an even more notable statistic comes from SocGen’s Andrew Lapthorne, who observed that if one looks at the top-10 stocks in the S&P 500, the “broad” market has never been more concentrated than it is today.

Nearly a third of S&P 500 market cap is held in only nine companies (considering dual listings). If analysts are correct, those companies will generate some 25% of 2022 EPS.

Ultimately, Lapthorne said, concentration risk in world’s risk asset benchmark par excellence has never been higher.

The title of his short note: “Return of the robber barons?”

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5 thoughts on “‘Concentration Risk’ In S&P 500 Has Never Been Higher

    1. GAMMA! Great idea.

      On another note, as we rush to window dress for year end, it looks like a NVDA is the “new Apple”, as in “we gotta show on NVDA on our year end statements.” It may ruin your great GAMMA moniker.

  1. It is worth noting that the fact that the FAAMG companies, or whatever we call them, enjoyed a rise in revenues 3x the average top-line growth for all other firms in the market, while only growing profits 2x as fast as the rest, while perhaps impressive, is clear evidence that these top firms are growing less efficient in their production of returns from capital used. When revenue grows faster than profits it means margins are declining, something that typically happens to firms who cut prices to try to grow sales. In the long run, such a strategy will doom these firms to mediocrity.

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