Eight companies are responsible for nearly half of the stock market’s decline this year, and the pain doesn’t end there.
com Inc., Tesla Inc..
and the parent companies of Google and Facebook have grown so large in recent years that they make up 25% of the S&P 500 by 2022. The benchmark US stock index is market value weighted, which means that most big companies have the most influence. .
Just recently, these companies were driving the stock market ever higher. Now that they are faltering, so is the broader market. In collaboration with Nvidia Corp..
and Netflix Inc..
they are responsible for 46% of the benchmark’s losses in 2022 through Wednesday on a total return basis, according to the S&P Dow Jones Indices.
The S&P 500 has fallen 18.2% in 2022, or 17.7% including dividends and stock distributions. The old darlings of the Stock Exchange have fallen again. Netflix down 70% and Facebook’s parent meta-platforms Inc.
and Nvidia are down 43% and 42%, respectively. The other five stocks fell between 23% and 36%.
“They’re taking a huge chunk out of the return from the S&P,” said Anne Wickland, portfolio manager at Easterly Investment Partners. “It’s really lopsided because of how many of these big names make up the top of the S&P 500.”
In a sign of their influence, a version of the S&P 500 in which each stock is assigned an equal weight is down just 13% in 2022.
Technology trading began to tumble late last year when it became clear that inflation was not coming down. Investors began to expect more aggressive monetary tightening from the Federal Reserve, which launched an ambitious campaign to raise interest rates. Higher rates are particularly painful for growth stocks, as their often lofty valuations rely on business expansion far into the future.
How much the Fed will raise rates is an open and important question for investors trying to discern the way forward for big tech stocks and major indices. If inflation takes too long to subside, central bank officials could decide they need to raise rates higher than currently expected, a development that could further punish the market’s heaviest stocks and tip the scales. potentially the economy into a recession.
For years, investors have favored the relatively expensive stocks of fast-growing companies, many of which are tech-related, over their cheaper, slower-growing counterparts. The pandemic has accelerated these bets, as the shift of many consumers to work, socializing and shopping from home has fueled rapid growth for many tech companies.
The S&P 500 has climbed 90% in the three years ending in 2021. Apple,
Alphabet Inc, parent company of Microsoft and Google.
were among the main contributors to the index’s outsized gains in each of those years. Apple shares, for example, are up 81% in 2020, while Microsoft shares are up 41%.
Some market strategists say the mainstream era of big tech could be in the rearview mirror. Investors favored cheaper stocks during the sell-off. The Russell 1000 Value Index is down 10% in 2022, while the Russell 1000 Growth Index is down 27%.
Stocks supporting the S&P 500 this year have been Exxon Mobil Corp.
and Conoco Phillips,
with Merck & Co.
and AbbVie Inc..
, according to the S&P Dow Jones indices. Energy stocks have climbed more than 40% this year, while Merck has gained 20% and AbbVie has climbed 12%. The five stocks traded this week at a lower multiple of their projected earnings than the benchmark.
“We’re in a high inflation world where interest rates are going to be higher on average than they have been in the past,” said Ed Campbell, managing director and portfolio manager at PGIM Quantitative Solutions. “It’s an environment that’s better for value stocks.”
The company’s multi-asset business has been selling growth stocks and buying value stocks for a year, he said.
Big tech stocks aren’t the only ones dragging the market down. This week, major retailers were punished, with Target Corp.
Shares fell 25% on Wednesday after the company missed earnings expectations as supply chain costs and inflation eroded earnings. Walmart Inc..
shares fell 11% a day earlier after citing similar reasons for earnings below expectations.
More broadly, the number of S&P 500 companies closing at 52-week lows jumped one day last week to 136, more than a quarter of index members and, according to FactSet, the most high this year. Another sign of generalized weakness? The percentage of S&P 500 stocks trading above their 50-day moving averages fell on the same day to 14%, the lowest level since April 2020.
With the heavy influence exerted by big tech stocks, many investors are paying close attention to these companies when considering their outlook for the market.
Tony Roth, chief investment officer at Wilmington Trust, said the selloff created a buying opportunity for stocks including Microsoft, Alphabet, Amazon and Apple, as well as some semiconductor companies.
“These companies are going to do very well for many, many years,” he said. “They provide the infrastructure or the backbone of the digital economy now and really the whole economy has been digitized.”
Write to Karen Langley at [email protected]
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