There are 500 companies* in the S&P 500, but 2015 has been a year for the top 1%. Five companies —Amazon.com AMZN +0.77%, Alphabet/Google GOOGL +1.47%,Microsoft MSFT +1.89%, Facebook FB -1.92% and General Electric GE +0.00% — have collective returns that account for more than the entire return of the index year-to-date, according to a note from Goldman Sachs. The sharp rally in just a few stocks is just as much cause for concern as reason for excitement though.
(Mike Kane/Bloomberg)
Excluding the aforementioned quintet, the S&P 500 would be down 2.2% this year, instead of being virtually flat, up 0.1%. Goldman’s chief U.S. equity strategist and the firm’s portfolio strategy research team note that narrow market breadth, with just a handful of strong performers carrying the load for a slew of weaker performers, tends to favor high-quality stocks with strong balance sheets and lower volatility.
“Mega-cap stocks outperformed in all three low breadth episodes int he mid-to-late 1990s, a trend that has re-emerged,” Goldman said in its Friday note. The group driving the S&P’s microscopic gain this year is a who’s who of the biggest companies in America, with market caps that rank second, third, fifth, sixth and seventh. Facebook and Amazon have each crossed the $300 billion mark this year, with Amazon’s 104% year-to-date return leading the index.
(Netflix also warrants mention, as the S&P 500′s top performer for the year. But even with its stock up 120% in 2015, Netflix is far smaller than the companies above and its $46 billion market cap dims its influence on the cap-weighted S&P.)
Notably absent from the list is Apple AAPL +1.61%, which has returned just 3.7% in 2015, and Wal-Mart, down 33% and suffering through its worst year in stock performance terms since 1973.
To Kostin and the Goldman team, concerns about narrow breadth are somewhat mitigated by the clear explanation for why mega-cap stocks are outperforming. “Modest U.S. economic growth and peak margins should put a premium on stocks with perceived high secular growth prospects. Large-cap firms are also more insulated than small-cap stocks from a further tightening in credit conditions.”
With the Federal Reserve closing in on its first interest rate hike, that latter point could become more important and tilt the scales even more in the favor of mega-caps for 2016.
The market isn’t cheap, Goldman says, pointing to a 16.3 times earnings multiple on the S&P that is near the highest levels since the tech bubble. But in an environment where few stocks seem to be a bargain, it’s reasonable to expect that the ones drawing the lion’s share of investor interest will be those promising the strength of a strong balance sheet and the possibility of growth better than the prevailing lackluster trend.
*The index actually has 505 stocks, thanks to two classes of stock for Google, Comcast, NewsCorp., 21st Century Fox and Discovery Communications.
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