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Fab five stocks lead the S&P 500 Index® record run

August 26, 2020

2020 year-to-date growth through August 21, 2020; Indexed to 100 chart
The S&P 500 Index® hit a fresh all-time high last week, completing a remarkable round trip that included the fastest 30% decline in market history and the best 100-day gain on record. While the benchmark stock index is up 5% for the year-to-date, a look below the surface shows the biggest names are driving this recent rally.

The largest five members of the S&P 500® (Apple, Microsoft, Amazon, Facebook and Alphabet/Google) account for 22% of the index’s total market capitalization, the highest level of concentration since at least 1980. At present levels, these five firms have the same market capitalization as the bottom 394 stocks. The biggest of these behemoths, Apple, added $420 billion to its market cap over the past month. That gain itself is larger than the market cap of all but seven S&P 500 companies. The performance of this group has been impressive; an equal-weighted portfolio of the five S&P 500® leaders would be up 51% for the year-to-date, while a portfolio of the remaining stocks would have lost 3%.

The outsized outperformance of these stocks has potential implications for the overall market. While the strength of this group has led to better performance for the broad index, the market is now susceptible to weakness in one or more of these leaders. Also, the group is highly valued with an average price/earnings ratio of 42-times forward earnings, nearly double the forward P/E of the entire S&P 500® and up from 26-times at the beginning of 2019. While the fundamentals for these companies are strong, these lofty valuations embed a tremendous degree of optimism. It’s not clear what catalyst could keep their recent momentum going in the foreseeable future.

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