M-cap of top 5 firms is now equal to 20% of S&P 500; here's why its a bad sign
The five companies are Microsoft, Apple, Amazon, Alphabet (Google), and Facebook
April 28, 2020 / 11:50 AM IST
The top five companies in the S&P 500 index - Microsoft, Apple, Amazon, Alphabet (Google), and Facebook - are now equivalent to 20 percent of its market capitalisation.
This exceeds the 18 percent level the measure reached in March 2000 during the dotcom bubble, raising concerns over the future performance of the US stock market, noted Bloomberg, quoting Goldman Sachs.
"Sharp declines in market breadth in the past have often signaled large market drawdowns," said Goldman Sachs' analyst David Kostin in a note.
The breadth of the market indicates how many stocks have advanced in comparison to those that are declining. Narrow breadth suggests that the market is rallying on the back of advances in a few stocks, while the majority are generating negative returns.
In the note, Kostin pointed out the S&P 500 index is about 17 percent below its February record, but the median stock is trading 28 percent from its peak. Citing past episodes of narrow breadth, he warned that the situation will not bode well for the market.
"Narrow breadth can last for extended periods, but past episodes have signaled below-average market returns and eventual momentum reversals," Kostin said.
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Kostin noted that the breadth of the market had narrowed ahead of the recessions in 1990 and 2008, in the tech bubble, and during the economic slowdowns of 2011 and 2016.
"Historically, sharply narrowing breadth has signaled below-average one-month, 3-month, 6-month S&P 500 returns as well as larger than average prospective drawdowns," he said.