It is a tale told by an idiot. Full of sound and fury, signifying nothing.
A famous lamentation about life from a medieval Scottish king seems to have captured investor sentiment about the possible impact of anti-trust congressional hearings held last Wednesday. As the CEOs of Amazon, Apple, Google parent Alphabet, and Facebook took a bipartisan bombardment about their potentially anti-competitive and monopolistic business practices for over five hours, the stocks of those companies advanced 1% to 2% in share price. The following day all four companies released quarterly financial reports that smashed Wall Street expectations, leading to further impressive stock gains.
Back in 2013, the acronym FANG (Facebook, Amazon, Netflix, and Google) gained currency in investing circles as a pithy way to refer to the technology companies that seemed to dominate market news. By 2017, Apple was added to the group to form the less-grammatical FAANG. This year, Microsoft's resurgence has seen the ill-formed FAANGM acronym gain popularity. No matter how you abbreviate them, a small group of big tech companies have only grown more prominent during the coronavirus lockdown and their outperformance has lead to an outsized dominance in the marketplace. The societal and political implications of their stature is best left to other publications, but we think it is important to look at how unusual this market concentration is from a financial perspective.
As of July 31, 2020, Apple accounted for about 5.4% of the US stock market by market capitalization ( the total dollar value of the company's public shares). The top 5 largest companies (Apple, Microsoft, Amazon, Facebook, and Google) made up about 19% of the US stock market. Is such concentration unusual? Well, historically no. The graph below from Dimensional Investing and the University of Chicago shows the overall market capitalization (or market cap) % of the largest 10, the largest 5, and the overall largest stocks.
At the end of 1967, the technology titan of the time, IBM, represented a larger portion (5.8%) of the market than Apple does today. In that year the top 5 stocks accounted for over 20% of the total market capitalization. In fact, the graph below shows that over the last 100 years, there has usually been a more concentrated market then there is now, and the hi-tech heavyweights of the time (whether AT&T, General Motors, General Electric, or IBM) were the main drivers of stock market growth.
So the current situation is not atypical historically. However, will the current top companies be able to leverage their dominance on the internet to continue to increase their market concentration? Well, the answer to that question deserves another quote from the play Macbeth:
If you can look into the seeds of time, and say which grain will grow and which will not, speak then to me.
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