One of America’s leading investment banks has expressed its concern that the gains currently fuelling the S&P 500’s recovery from the Covid-19 panic are too narrowly spread.
In his Weekly Kickstart note, Goldman Sachs (GS) analyst David Kostin observed:
This is by no means the first expression of investor ambivalence about the tight dominance of Microsoft (MSFT), Amazon (AMZN), Facebook (FB), Google (GOOGL) and Apple (AAPL) in America’s leading index. However, the economic devastation wrought by the Covid-19 crisis has brought such anxieties into sharper focus. Kostin added:
At the start of the year the five aforementioned stocks accounted for 18 per cent of the index’s total market cap. This figure has since surged to 20 per cent, surpassing the peak of the “Tech Bubble” or “Dot-com bubble” in March 2000, to become the highest concentration in the S&P 500’s history.
While this surge may have buoyed the immediate American recovery from the market-wide coronavirus sell-offs of mid-March, in Goldman’s eyes it is not ideal. Kostin stated: “The further market concentration rises, the harder it will be for the S&P 500 index to keep rising without more broad-based participation."
While the bank had observed at the start of the year that these mega-cap stocks could avoid a repeat of the “Dot-com” bubble, thanks to their significant earnings power and valuations, by late-April it is less sure.
Kostin admitted that in some cases: “an improving economic outlook and strengthening investor sentiment helps laggards ‘catch up’ to the market leaders.” However, he also stated:
With one of the world’s leading financial institutions increasingly concerned, the road ahead for what President Donald Trump calls the “$1 trillion club”, could be bumpier than it currently appears.