Investors have piled into big technology stocks including Apple, Microsoft and Amazon.
Photo: Budrul Chukrut/SOPA Images/ZUMA PressThe stock market is more top-heavy than it has been in decades.
The collective market value of the top 10 companies in the S&P 500 has swelled to about $8 trillion as of Friday as investors have piled into big technology stocks including Apple Inc., Microsoft Corp. and Amazon.com Inc.
Together, the 10 biggest firms comprise 29% of the index, according to data through July 31 from S&P Dow Jones Indices. That is the highest percentage in at least 40 years and up from 22.7% at the end of 2019.
The gains among the top stocks are pushing the S&P 500 and Nasdaq Composite back to record levels. But they are masking the underlying weakness of the broader market where other indexes like the Russell 2000, which tracks small-cap stocks, are still in the red for the year.
Some investors also warn that such a heavily concentrated market is dangerous because any tumult in the tech sector would likely exacerbate a broader downturn.
“This is clearly a narrow market dominated by extraordinary gains by a very small segment,” said Andrea Bevis, senior vice president at UBS Private Wealth Management. “The disparity between sectors is the largest we’ve ever seen.”
The S&P 500 is up 3.7% this year and just 1% below its February record, while the tech-laden Nasdaq Composite index is up 23% and has set 32 records in 2020.
More so than big multinational companies, the fate of small-cap stocks and other groups like the Dow Jones Transportation Average are often intertwined with the health of the domestic economy. Those groups have remained under pressure during the coronavirus pandemic with 30 million Americans on some form of unemployment and the economy contracting at a record rate in the second quarter. The Russell 2000 is down 6% in 2020, while the Dow Transports—which track the performance of 20 large U.S. airlines, truckers, railroads and shippers—are off 3%.
Even within the S&P 500, cyclical sectors tied to the broad economy, including the energy, financial and industrial groups, have suffered steep losses. The sharp drop in demand for oil, low interest rates and a slowdown in the manufacturing space have dented demand for those stocks.
The pandemic, however, has been a boon to many tech companies that have benefited from work-from-home and other digital trends.
“There are a series of structural changes we expected to happen over three years, that happened in three months,” Ms. Bevis said.
Amazon.com has led the way with a 71% advance, followed by Apple, which is up 51%. Microsoft has risen 35%, Facebook Inc. is up 31% and Google parent Alphabet Inc. has climbed 12%.
The five firms together represent about 22.7% of the S&P 500, according to S&P Dow Jones Indices, up from 15% at the end of 2019 and well above the average of 13% from 1980 through 2019.
Some analysts warn the pace of returns among the big tech stocks is likely to diminish as they become more expensive.
Nate Fischer, chief investment strategist at Strategic Wealth Partners, said crowding in a handful of stocks suggests a selloff could be exacerbated if investors all try to exit at once.
“Once there is an exodus out of these names, what’s that mean for everybody who’s in the stock?” he said.
Write to Paul Vigna at paul.vigna@wsj.com
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