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Is it a Tech Fund in Disguise?
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this S&P 500 Index Often considered broadly representative of the stock market – in fact, for many, the index yes The stock market consists of approximately 500 large-cap stocks. But lately it has been dominated by the largest companies, most of them in the tech sector, to an extent not seen in decades. In fact, for most of 2024, the 10 largest stocks accounted for more than a third of the index’s market capitalization.
This concentration has been very good for investors so far, with the index rising more than 20% annually for two consecutive years. But consider the so-called top seven stocks — Alphabet (Google), Amazon (Amazon), apple(AAPL), Yuan (Mehta),Microsoft(Microsoft Corporation), NVIDIA (NVDA) and Tesla (Tesla) — accounting for more than half of the index’s 25% gain in 2024. This imbalance could create risks if the market reverses and experiences a severe sell-off.
Considering the index is a common vehicle for investors to invest broadly in U.S. stocks, including through 401(k) retirement accounts, few can escape the pain.
Market Cap Weighted S&P 500 Index
The S&P 500 is structured so that companies with larger market caps receive a greater weight in their performance. Market capitalization is calculated by multiplying a company’s share price by the total number of shares outstanding. The index’s weightings adjust with changes in share prices and number of shares outstanding, ensuring it reflects current conditions.
The S&P 500 is also float-adjusted, meaning only publicly outstanding shares are used to calculate its weightings. often used as a benchmark mutual funds and ETFIt is widely recognized for its broad market coverage and reliable weighting methodology and is considered a barometer of the health of the broader U.S. economy.
What this means for the S&P 500
Market cap weighting gives dominant companies like Magnificent 7 a huge impact on the index’s overall returns. When the share prices of these and other technology companies rise, their weighting in the index increases, further enhancing their influence, including during any sell-offs.
S&P 500 Index Performance in 2024
In 2024, U.S. stock investors had another great year, with the S&P 500 index rising by 25%. But the details behind the impressive gains reveal how much influence a handful of stocks have on the market-cap-weighted index. The Magnificent 7 index accounts for 53% of the S&P 500’s total gain in 2024. Without these seven stocks, the index would only rise 11.75%.
The table below lists how each member of Magnificent 7 will perform in 2024.
| 7 stocks to watch in 2024 | ||
|---|---|---|
| stock ticker | Name | Price increase in 2024 (%) |
| AAPL | apple | 30 |
| NVDA | NVIDIA | 171 |
| Microsoft Corporation | Microsoft | 12 |
| letter | 36 | |
| Mehta | meta platform | 65 |
| Amazon | Amazon | 44 |
| Tesla | Tesla | 63 |
What it means for tech stocks to underperform
Due to its massive weight, similarly outperforming companies like Nvidia (NVDA), if Apple and Amazon start to underperform or the broader tech sector suffers a severe sell-off, they will drag down the S&P 500. While sectors such as consumer discretionary, communications services and financials may help cushion the blow, the pain will spread to nearly everyone with a 401(k).
Of course, if tech stocks do underperform other sectors, market capitalization will change and the index will be rebalanced, reducing the weight of tech companies and their impact on index performance. But that may be little comfort to any investors who have suffered losses along the way, even if only superficially.
bottom line
The market capitalization weight of the S&P 500 and the recent outsized influence of technology companies have been very beneficial to investors over the past few years, driving the index sharply higher. However, the weighting of a relatively small group of stocks also poses a potential risk that they could have an outsized impact in pulling the index during a sell-off.
This doesn’t mean the market is about to sell off. In fact, Goldman Sachs points out that the S&P 500 rises more often than it falls after peak concentration periods.
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