The dominance of Wall Street giants poses risks to the markets

Losses in big-hitting US technology stocks extended into the early days of 2023, with warnings of more pain to come for market giants, including electric car maker Tesla.

Biggest 10 Stores With market capitalization in the S&P 500 at the index’s peak in early 2022, including Tesla, Apple, and Microsoft, they collectively lost $4.9 trillion last year. So far in 2023, the market capitalization of these companies has shrunk by another $110 billion.

Wall Street stocks are dominated by the big corporations, with the top 10 stocks accounting for about 30 percent of the S&P 500 near the peak of the bull market at the end of 2021. Now that pullback points to a market where such intense concentration will start to fade.

“There has been some lack of focus, but it’s very small compared to what has accumulated,” said Tatjana Bohan, vice president of investment at TOBAM, an asset manager in Paris. “We’re at the beginning of this, we’re nowhere near the end yet.”

On average over the past two decades, the top 10 stocks account for nearly a fifth of the S&P 500 index and the top five, 13 percent. But the focus has intensified. At the peak of 2020, the top five accounted for 22 percent. By December of last year, it had waned somewhat, but the Big Five — Apple, Microsoft, Amazon, Google parent Alphabet and Warren Buffett’s Berkshire Hathaway — still made up 17 percent, according to Bloomberg.

The decline in some of these stocks outpaced the decline in the broader market by a large margin. The S&P 500 is down 19 percent in 2022. Meanwhile, Tesla It lost nearly two-thirds of its value last year and dropped out of the top 10 on the index, and is down another 10 percent this year.

The dominance of the huge stocks became self-reinforcing as they surged higher in the wake of the global Covid-19 outbreak. Index-tracking funds have been forced to buy them in line with broader market metrics. But that works in reverse, now that the big names have suffered a host of problems.

Savita Subramanian, head of US equity and quantitative strategy at Bank of America, noted that many fund managers have been put off in the direction of megacaps because they have been reluctant to take so much risk with such a small group of companies.

Line chart of the market capitalization of the 10 largest companies at the peak of a pandemic-era bull market showing the decline of Wall Street giants

“Last year was a stock-picking market,” she said, noting that three-fifths of the S&P 500 outperformed the index itself, sending it drifting to its worst loss in 14 years by its largest constituents. “There is still more pain in the big companies because we haven’t seen a bout of selling among active managers,” she added.

Focus periods aren’t new—they built on other boom times like the dot-com bubble that exploded in 2000 and the “neat fifty” household names that became popular in the late 1960s.

However, the current valuation is still more extreme, with valuations outside the market behemoth much smaller than in previous group tops. In 2000, it took 253 of the smallest members of the S&P 500 to match the size of the top five, Bohan calculates. Today it takes 456.

Others frame the issue of focus as part of the broader battle between fast-growing and usually expensive stocks and less glamorous stocks desirable for their steady earnings and dividends, collectively known as “value.” Several Wall Street giants fell into the first category and soared in 2020 and 2021 when extremely low borrowing costs prompted traders to look for yield. This trend reversed sharply in 2022 when central banks raised interest rates, and even now in 2023 many of these stocks continue to decline.

“It reminds us a lot of the tech bubble bursting, when people saw tech stocks crash — and then they crash again, and again,” said Rob Arnott of Research Affiliates, asset manager.

The S&P 500 and its predecessors have produced consecutive losses over the course of a calendar year only four times in a history stretching back to 1928, but one of those periods followed the Internet bubble, when the index fell for three consecutive years.

Arnott pointed to Tesla as an example of still-high valuations among major companies that point to more selling to come. Although it fell last year, the electric car giant’s market capitalization is still around $350 billion, or 21 times its projected earnings. By contrast, Toyota, the world’s largest automaker, is valued at $225 billion, estimated at eight times its expected earnings.

“Value performance was below par [until recently] Not because companies were doing badly, but because they were losing popularity and getting cheaper.” “I look at this as two years in a five-to-seven year span of value winning — and that just brings us back to historical norms.”

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