Pandemic Forces New Realities on S&P 500 and Dow Indexes

By Matt Schmitt, CFA®
September 17, 2020

Historic events in the stock exchanges can slip by quietly as the coronavirus pandemic changes the way we do business.

Mega-Cap Stocks
It seemed appropriate to point out two recent major developments that investors should factor into their thinking.

First is the continued surge of the six mighty mega-cap tech stocks that hold titanic sway over the S&P 500, and the second is the Dow Jones Industrial Average’s attempt to better match its member companies with the new economy we live in today.

Let’s look at the mega-caps first. It seemed timely to share an update on our commentary from this past May, given recent market volatility. These six companies stretched more, and now represent almost 25% of the S&P 500 market capitalization and approximately 20% of the earnings, as of the end of August. The big six companies referred to are Facebook, Apple, Amazon, Netflix, Google and Microsoft, and as investment advisors tend to do, we give them an acronym – FAANGM.1

These six companies now represent over $7 trillion of market capitalization, up from roughly $4 trillion in April 2020. Apple, the largest of the six, is valued at over $2.2 trillion in market cap and is now larger than the combined market cap of the companies that comprise the Russell 2000 Index. Collectively, these six companies have a larger market capitalization than the combined market cap of the Energy, Materials, Industrials and Financials sectors of the S&P 500.

While this overwhelming size and weight feels like a good thing as it continues to lift market indexes to new record highs, it can be just as scary when those same market indexes drop lower as investors decide it is time to sell.

We feel it is important for investors to understand the great influence and impact that these largest companies can have on market returns. Evidence of this is clear in the year-to-date returns through August 31st with the S&P 500 returning 9.7% compared to the return of the six FAANGM companies of 56.6% and a decline of -0.10% for the other 494 companies in the Index. Longer term, a similar pattern exists where over the past five years these six companies have outperformed the S&P 500 Index by 20.3% per year.

FAANGM Weight in Market

Meanwhile, another major market index, the Dow Jones Industrial Average (DJIA) recently announced some changes to the stocks in its Index. These changes were announced shortly after Apple announced their 4-for-1 stock split, which lowered the index weight to the technology sector because the DJIA is a price-weighted index versus a market cap-weighted Index like the S&P 500. Apple’s stock split in effect lowered the Index exposure to technology so it was announced that would replace Exxon Mobil to boost the technology weighting. In addition, Amgen replaced Pfizer and Honeywell International replaced Raytheon Technologies.

FAANGM Annualized Return

Add this to the fact that General Electric, maker of everything from light bulbs to jet engines and a 110-year charter member of the Dow, was unceremoniously booted from the exchange in June of 2018. GE was replaced by Walgreens Boots Alliance, not exactly a household name. Yet a good choice to reflect the changing market dynamics.

We are not calling for the end of the strong results from this group of companies who have all proven to be wellpositioned to continue growing their earnings through the challenging economic conditions of 2020. We share this information in hopes that investors will better understand what factors are impacting market returns and, from time to time, causing what look to be larger swings in the results of the S&P 500 Index on a day-to-day basis.

1 Editorial note: Another important aspect about the FAANGM group is to recognize its impact on the results of growth versus value. Growth stocks are outperforming value stocks by nearly 40% thus far in 2020. Another question that comes up on the FAANGM group is why do we not include Tesla in this group of companies? While it has certainly been a “hot” stock that has gone up almost six-fold in 2020, it is not in the S&P 500 Index, so it is not having the same impact on a common market benchmark.

Past performance is no guarantee of future results, and the opinions and other information in the commentary are as of September 17, 2020. This summary is intended to provide general information only, may be of value to the reader and audience, and any opinions expressed herein are subject to change.

This material is not a recommendation of any particular security or investment strategy, is not based on any particular financial situation or need and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional. Diversification does not guarantee a profit or protect against all risk.

Commerce does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product and specific financial situation.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed, and is subject to change rapidly as additional information regarding the conditions which impact the represented subject matter may change. Commerce Trust is a division of Commerce Bank.



matt schmitt
Matt Schmitt, CFA® Senior Vice President, Portfolio Manager Commerce Trust
Matt is a portfolio manager for Commerce Trust. Upon gaining a thorough understanding of a client’s needs and goals as well as assessing the client’s entire financial situation, he works with our investment research team to construct a portfolio to help clients achieve their long-term goals.

Matt comprehensively represents our research and goals-based investment process, starting with the initial assessment and creation of an investment objective to ongoing evaluation and adjustments based on changing market and life circumstances. With a deep knowledge of the market and experience in investment management, he serves clients with thought leadership, insight, and consulting services. In addition to his other responsibilities, Matt chairs the Equity Strategy Committee, is a full-time member of the Investment Policy Committee, and serves as lead portfolio manager for the Commerce Value strategy. Matt joined Commerce in 2002.

He completed his undergraduate work in 1994 at Drake University and received a Bachelor of Science degree in business administration and business management. Matt holds the Chartered Financial Analyst® designation and is a member of both the Kansas City Society of Financial Analysts and the CFA Institute.

Matt has volunteered as a patron for the Blue Valley School Board Facility Planning Committee for the past 12 years. Matt enjoys spending his free time with family and friends. Matt and his wife, Kristin, have two daughters and enjoy attending local arts and theater events as often as their schedule will allow.