Just five stocks account for nearly a fifth of the S&P 500’s (.SPX) total market capitalization—the highest share since the dot-com bubble peaked at the turn of the century.
Are there worrying parallels between the ascent of Facebook Inc. (FB), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Microsoft Corp. (MSFT) and Alphabet Inc. (GOOG) and the ill-fated dot-com boom of 2000? Goldman Sachs Group Inc. (GS) says not yet.
For one, the stock market’s five biggest companies don’t look as expensive as their counterparts from 2000.
In March 2000, Microsoft, Cisco Systems Inc. (CSCO), General Electric Co. (GE), Intel Corp. (INTC) and Exxon Mobil Corp. (XOM) made up 18% of the S&P 500’s market capitalization. The five companies traded at 47 times expected earnings, according to Goldman. Today’s five biggest companies trade at 30 times expected earnings—making them by no means a bargain, but still less expensive than the stocks that dominated the stock run in the early 2000s.
The tech giants powering the S&P 500 today also reinvest far more of their profits into their businesses than their predecessors did.
The five companies funnel about 48% of their cash flow from operations into capital expenditure and research and development spending, according to Goldman, well above the S&P 500’s 21% average and the 26% average for the five biggest companies in March 2000.
Then there are earnings. Apple, Microsoft, Facebook and Amazon reported quarterly results last week that showed their core businesses remain on strong footing, even in a slowing economic environment.
Apple, for instance, posted record revenue for its latest quarter, thanks to strong sales of its iPhone and a pickup in sales of products like its apps and AirPods wireless earbuds. Growth in its cloud-computing offerings helped Microsoft deliver record sales. Facebook and Amazon also posted double-digit percentage revenue growth.
Will the companies be able to sustain their record of growth? It is unclear. Money managers say there are still risks that longstanding issues like regulatory scrutiny and shifts in user behavior could hit the technology sector. The stocks have also been among the worst-hit in waves of selling that the stock market has endured in the past few years, something investors have attributed in part to crowded positioning in the growth trade.
But for now, Goldman says there is reason to believe today’s S&P 500 behemoths are different.
“Lower growth expectations, lower valuations and a greater reinvestment ratio suggest the current concentration may be more sustainable than it proved to be in 2000,” the firm said in a note.
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