There has been a lot of concern from “strategists” and financial media about how concentrated the S&P 500 has become. For background, this is a benchmark of the 500 largest US companies that is weighted by market capitalization, or equity value. Some point out that such concentration is not healthy, has never proven to be durable, and it’s just a matter of time until these firms fall off the mountain top. In short, these companies have become so large that there just can’t be much upside left. We disagree. While these are US-based companies, they generate sales and earnings on a global basis. Their international operations are a major component of their equity valuation. We believe comparing this numerator only to the sum of the 500 largest US firms is faulty math. A more appropriate denominator is one that includes all global equities. On this basis, this “concentration” issue is much less daunting.
|
($billions) |
Market Capitalization | S&P 500 Weighting | US Equity Weighting |
Global Equity Weighting |
| Microsoft | $3,327 | 7.3% | 6.2% | 3.0% |
| Apple | $3,192 | 6.6% | 5.9% | 2.9% |
| Nvidia | $2,905 | 6.4% | 5.4% | 2.6% |
| Alphabet | $2,224 | 4.2% | 4.1% | 2.0% |
| Amazon | $1,931 | 3.7% | 3.6% | 1.7% |
| Meta Platforms | $1,266 | 2.4% | 2.3% | 1.1% |
Source: HFS, FactSet, World Federation of Exchanges, Securities Industry and Financial Markets Association.
As of June 26, 2024
According to FactSet, the S&P 500 carries a market capitalization of just under $46 trillion. However, this isn’t even the full value of all publicly traded US stocks. That number is around $54 trillion, according to the Securities Industry and Financial Markets Association. We know that the top 6 firms in the S&P 500 are global companies. About half of Microsoft’s sales came from overseas last year. Apple only generated 42% of its revenue from the “Americas” region, which not only includes the US but Canada, Mexico, and South America. Thus, to get a truer perspective of how much runway remains, we should be comparing the valuations of global companies on a global basis. According to the World Federation of Exchanges, the equity value of all publicly traded firms is about $112 trillion. Importantly, this isn’t a static amount. It has grown from $31 trillion in 2000.
These US-based companies continue to take market share on a global basis, and their equity valuations reflect this reality. In our opinion, the market has never seen firms like these that have such incredible global scale and deep competitive advantages that allow them to sustain high growth rates and margins for this long. We argue that they have no true international rivals and continue to branch out into large new markets, including health care, shipping, and financial services. Thankfully, they’re headquartered right in our backyard.
Enjoy your upcoming 4th of July. We’re thankful for everything our country provides.
The opinions expressed are those of Harrison Financial Services as of June 26, 2024 and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly.