Why Big Tech Stocks’ Massive Gains Could Be Bad News for Investors

• Big Tech stocks have jumped in 2023, with Meta and Nvidia both soaring over 100%.
• Those gains have only increased the technology giants’ dominance of the S&P 500.
• The higher concentration levels could make the benchmark index vulnerable to wild swings.

Never before in the history of US stocks has a small clutch of companies from the same industry held such sway over the entire market.

Six stocks – Apple, Microsoft, Google parent Alphabet, Amazon, chipmaker Nvidia, and Facebook owner Meta Platforms – now have a combined valuation of around $10 trillion and make up over a quarter of the S&P 500‘s total market capitalization.

But that could be bad news for investors.

Soaring share prices

All of the stocks have surged by double digits in 2023 – with Nvidia and Meta more than doubling in price – thanks to the AI craze and the expectation that the Federal Reserve will soon pause its interest-rate hikes.

Their massive advances account for most of the S&P 500’s gains year-to-date.

The benchmark index is up 8% in 2023 – but its returns shrink to just 2% if you exclude tech, as demonstrated by the fund-price performance of ProShares’ S&P 500 Ex-Technology ETF:

The S&P 500 is also significantly trailing the tech-heavy Nasdaq Composite, which has entered bull-market territory with a 22% jump this year.

Unprecedented dominance

It’s historically rare for a handful of stocks from the same sector to make up such a large part of the S&P 500.

The last time the five biggest companies by valuation accounted for a quarter of the index’s total market cap was the 1960s, according to data from Schroders.

This is also the first time ever that all five of the largest publicly-listed companies – right now that’s Apple, Microsoft, Alphabet, Amazon, and Nvidia – all came from the same industry.

Stock market vulnerability

It might be tempting to see tech’s dominance as a good thing.

But stocks from the same industry tend to be vulnerable to the same macroeconomic factors – like rising interest rates, which often hit tech stocks worse than other companies because they’re more reliant on borrowing cash.

The S&P 500’s overall market cap is so concentrated around techs that it’s more vulnerable than it was previously to massive price swings, according to Minerva Analysis founder Kathleen Brooks.

“When there’s a narrow group of leaders, there’s a big risk if something bad happens to tech,” she told Insider. “If interest rates go to 7%, as Jamie Dimon warned the other day, then that becomes bad news for the whole market.”

So while Big Techs have powered stocks’ surprise 2023 rally, their swelling market capitalizations might eventually prove to be more of a curse than a blessing for investors.

Read more: Facebook parent Meta and Nvidia have both seen their stock prices double within the first 5 months of 2023