With the U.S. economy in top gear, the stock market appears to be humming along. But it’s recent gains may be more fragile than you think.
While the S&P 500 index is up more than 6% so far in 2018, those returns have been driven by just a handful of large, high-performing stocks. That’s a worry to some investors who warn that if these companies’ business prospects turn south, it could drag down the whole market.
Like most well-known stock indexes, the S&P 500 is “value weighted,” meaning companies whose stocks are highly valued have a proportionally bigger impact on the index’s returns. (Most index funds, which many Americans own instead of individual stocks, are designed the same way.)
The top-heavy orientation has helped in 2018 when a handful of the U.S.’s largest tech companies — a group that together represents about 10% of the index — have also been its top performers: Apple, the world’s most valuable company, which represents a whopping 4% of the index, is up 10% so far this year. Amazon and Microsoft, which each represent about 3%, are up 55% and 12% respectively. While Netflix, which represents about 0.7%, is up 106%.
The flip side is that without these four superstars, the S&P 500’s 2018 record looks much less impressive, returning only about 3%, according to calculations by S&P Dow Jones Indices. To put that in context, the index’s long-term average historical return is about 10%.
Now some investors worry the market’s reliance on so few companies — particularly ones in the same sector — could turn ugly if and when those stocks lose their luster. “If you strip out a handful of outperforming tech stocks, the lack of breadth in the equity markets is troubling,” said Larry Fink, chief executive of BlackRock, the world’s largest asset manager, during recent a call with analysts.
The issue came into play earlier this week, when Netflix reported earnings that didn’t live up to analysts’ expectations. While its revenues jumped 5.5% to $3.9 billion, analysts had expected a higher mark. More worrisome was the number of expected new subscribers, which came in one million below what the company had forecast.
Netflix plummeted 13% on the news, before rallying in the days that followed, while the S&P 500 flat-lined.