S&P 500 index is up 19% so far this year, which is among the largest gains through September 15 in the last 50 years. In recent memory only 2019 and 2013 come close. Of course, those years weren’t in the midst of a global pandemic! We have been getting a lot of questions about why the market is doing so well and, frankly, I’m as surprised as anyone. So I decided to dig into the data to see what’s driving it and what’s going on under the surface of the index. All of the returns referenced in this post are YTD (year to date) through September 15, 2021.
First, let me explain the methodology. S&P 500 is a market capitalization-weighted index. Market cap is a dollar value of the company’s equity that’s a product of number of shares outstanding times market price per share. As an example, let’s look at Apple in Exhibit 1. The company started the year with market cap of $2.2 trillion (not a typo) and it currently stands at $2.46 trillion (and just three years ago I thought $1 trillion was a lot back here). So it gained $230 billion in market value or 10.3%. Exhibit 1 goes through this exercise for all five members of the FAAMG group, which, conveniently, are the only companies in the trillion dollar club. I did the same analysis for all 500 (actually 505) members of the index to arrive at aggregate numbers. Collectively, the index added $6.48 trillion in market cap this year or the aforementioned 19%. It now stands at $40 trillion in market value. The FAAMG group added almost $2 trillion or roughly 30% of the total. Everyone knows these companies and why their business is doing so well. But where does the other 70% of the gain come from?
Note: There are some potential issues in looking at market cap change for individual companies (such as large mergers) but it works well for the index-level analysis.
Exhibit 1 – FAAMG and S&P 500 YTD Market Cap Gains
In Exhibit 2 I took top 25 market cap growers (and thus contributors to S&P performance) and calculated their impact with and without FAAMG. Overall these 25 stocks accounted for 55% for of the index return this year, which drops to 24% if we exclude FAAMG detailed above. So what factors are driving such strong growth in these companies? NVIDIA and Applied Materials are riding strong demand for and shortage of semiconductors. Moderna is the primary beneficiary of a massive COVID vaccination campaign – it grew form $42 billion to $176 billion or 322%. Another vaccine play, Pfizer, is also on the list at number 25 but it’s up “only” 22% being a more diversified pharmaceutical company. (Does that mean that “one-trick pony” Moderna is overvalued? I’ll let you make that decision). Warren Buffet’s Berkshire gained $93 billion but it so diversified that it’s hard to attribute it to any one factor. There are four major banks on the list which are beneficiaries of the economy rebounding from COVID crash. Tesla is a cult stock that cooled off from the insane gains of 2020 but still holding up fine. There are several other healthcare stocks that are benefiting from larger trends and democratic policies (although that might change if they get prescription price controls through). Also on the list are various tech companies (Adobe, PayPal, Oracle, etc.) that are executing well. Home Depot is still riding housing and remodeling boom. Exxon Mobil is benefiting from oil price rebound on stronger economy.
Exhibit 2 – Top 25 Contributors to S&P 500 YTD Market Cap Gains
Is everything going up then? Not exactly but near enough. There are only 78 companies in the index with negative value change – that’s better than 5 to 1 ratio for positive/negative. Exhibit 3 shows top 20 detractors from S&P performance. It’s a very mixed bag of reasons. We have a few pharma/biotech companies driven by product-specific issues. Then some dying industries like phone companies and retail doing the slow burn. There are some cases of companies that ran too far too fast in 2020 (last column) and are giving up some gains, like Qualcomm as well as videogame companies Activision and Take-Two. Las Vegas Sands is dealing with regulatory issues in China. There are also four payment companies that have done great for years but are starting feel the heat of Venmo (PayPal) and cryptocurrency alternatives. Colgate-Palmolive had a good year with hygiene obsession that is now waning. In any case, these 20 companies only detracted 3.5% from the index return versus +55% contributed by top 25 in Exhibit 2.
Just to reinforce the themes from Exhibits 2 and 3, I put in top/bottom industries in Exhibit 4.
Exhibit 3 – Top 20 Detractors From S&P 500 YTD Market Cap Gains
Exhibit 4 – Top and Bottom 10 Industry Contributors to S&P 500 YTD Market Cap Gains
So there you have it – lots of different reasons for “the market” being up so much and very few to counterbalance to the downside. Now that I reviewed which companies are driving the performance, in the next post I’ll look at whether their fundamentals (earnings) and valuations back up the rise in price.