With four of the five largest companies on the market set to report earnings on Thursday, and technology stocks lagging behind the market on several days over the past two weeks, you have likely read plenty about how Big Tech stocks are driving the market in 2020.
You may have heard comparisons made to the 2000 technology bubble, and dire predictions about how the current run-up in tech stocks will end just as badly for investors.
The combined market capitalization of
(MSFT) is 22% of the
That’s a lot. In fact, it is more than the 18% share that the five most-valuable companies commanded at the tech bubble peak in March 2000. Back then, Microsoft,
(XOM) were the top dogs by market cap.
And just like in 2000, the five Big Tech stocks have trounced the market over the past year. They are up 49% on average, while the rest of the S&P 500 is about flat. That’s a big gap.
So it must be a bubble right? No so fast. Credit Suisse chief U.S. equity strategist Jonathan Golub said in a report on Monday that the comparisons to the tech bubble—and predictions of a coming crash—aren’t justified by a comparison of the companies’ fundamentals. The top five stocks today make up a larger share of S&P 500 earnings—with faster relative projected growth—than they did in March 2000. And they trade for a cheaper valuation multiple than the top five did back then, too.
While a nearly 50% performance advantage over 12 months is obviously significant, about three-quarters of that outperformance can be explained by superior earnings. Earnings drive stock prices in the long run, after all.
The comparison to the tech bubble peak falls apart more on the fundamentals as well, according to Golub. In March 2000, the top five stocks in the S&P 500 posted earnings and sales growth of 18.0% and 16.8%, respectively, over the preceding 12 months. That compared with 15.4% and 12.1%, respectively, for the other 495 S&P 500 companies. The big five of 2000 were ahead for sure, but not by leaps and bounds.
Today, Alphabet, Amazon.com, Apple, Facebook, and Microsoft are sitting on 3.1% earnings growth over the past four reported quarters, while the remainder of the S&P 500 have seen earnings contract by 9.2%. The revenue gap is also wide: 11.2% growth for Big Tech and just 0.8% for the rest.
And—significant in times of market stress and volatility like the current environment—the biggest five companies today have net cash positions on their balance sheets and much wider profit margins than the rest of the S&P 500 and the big five of 2000. That means they can withstand shocks much better, and justifies premium valuations and performance in a down market.
For Golub, that means the big can continue getting bigger.
“The conclusion seems quite clear, today’s larger names are superior on almost every financial metric including revenue and profit growth, margin structure, volatility, and corporate leverage,” Golub wrote on Monday. “As such, we wouldn’t be surprised to see the performance gap widen even further.”
Write to Nicholas Jasinski at [email protected]