The first quarter has ended and both equities and US Treasuries recorded stellar returns, much needed following a dismal 2022 for both traditional asset classes.
The S&P 500 served up a very respectable 7.0% return in the first quarter.[1] As I have done in the past, I wanted to dig a bit deeper to see what the drivers were as far as the overall performance of the S&P 500 index in the quarter. You probably won’t be surprised to learn that a well-known group of large technology companies accounted for all of the indices’ positive performance. Specifically, I am referring to the infamous group of five tech giants that used to be referred to as the FAMAG stocks (and before that, with Netflix as the FAANG stocks): Apple (AAPL), Amazon (AMZN), Alphabet (GOOG[2]), Meta Platforms (META, formerly Facebook) and Microsoft (MSFT). To this group of five well-known stocks, I have also added chip-maker NVIDIA (NVDA) and EV manufacturer Tesla (TSLA), since both have emerged as significant players in the technology arena.
As far as relevancy, these seven companies (eight stocks since Alphabet is dual-class), which represent only 1.6% of the index by number of stocks, accounted for 26.4% of the $34.3 trillion market cap of the S&P 500 index on March 31, 2023. As you might expect, these seven companies are all in the top 10 of the largest S&P 500 components, with the other three companies in the top 10 being Berkshire Hathaway (BRK.B, 6th), Exxon Mobile (XON, 9th) and UnitedHealth Group (UNH, 10th).
I have included four other tables below (with links should you wish to skip ahead), which illustrate:
Table A: The change in market capitalisation of the five legacy stocks and all seven stocks, individually and collectively, each year since 2011 and in 1Q2023.
Table B: The change in market capitalisation by year and over three-, five- and 10-year periods for the S&P 500, the five legacy tech giants, all seven tech companies, and the S&P 500 excluding the seven tech companies. These are examined over the periods 2011 to 2022, and 1Q2023, and enable you to see how influential these companies are in terms of driving the overall return of the index.
Table C: Returns on the S&P 500 index and for each of the seven technology companies using their (near) year-end share price each year since the end of 2010, and at the end of 1Q2023. Note that this looks at the change in share price, not the change in market capitalisation, as there can be minor differences. It also looks at compound average growth rate (CAGR) of the index and each company over three-, five- and 10-years, and presents certain valuation metrics for the companies as of March 31, 2023.
Table D: I will not refer to this in the commentary below but it shows quarterly returns for the seven stocks since the beginning of 2020, and the compound growth rates for the 13 quarters ranging from 1Q2020 to 1Q2023.
Looking at the tables, the conclusions are:
The seven technology giants saw their relevancy in the S&P 500 index decline sharply in 2022 as markets declined because these stocks performed significantly worse (twice as bad) as the overall index. However, they regained much of the lost ground in the first three months of this year. (See Table A.)
The five legacy tech stocks and the seven giants, including NVDA and TSLA, saw their collective market capitalisation increase 26.9% (five legacy stocks) and 33.2% (five legacy plus NVDA and TSLA) in the first quarter. If the S&P 500 is considered without these seven companies, its market capitalisation in 1Q2023 would have actually decreased by 0.4%. (See Table B.)
Over five- (2018-2022) and 10-year (2013-2022) periods, the collective market capitalisation of both tech groups increased by more than twice that of the S&P 500 excluding these companies from the index, again showing just how important these companies are to the overall return of the S&P 500. (See Table B.)
The third table (Table C) below shows the magnificent seven and their annual returns since 2011. There are also some valuation metrics at the bottom of the table, which show that:
NVDA (+90% 1Q23), META (+76% 1Q23) and TSLA (+68% 1Q23) are in a class by themselves so far this year, all registering significant gains. In fact, NVDA shares nearly doubled in 1Q23.
Valuation multiples of these companies are higher than those of the S&P 500 index, not particularly surprising given the strong growth of these seven companies over many years.
The valuations (forward P/E, price-to-sales) of TSLA and NVDA look very expensive at these levels, when compared to the S&P 500 index and to the other five “legacy” technology companies. Having said this, both AAPL and MSFT also appear to be richly priced given their slower growth trajectories.
Only AAPL, MSFT and NVDA (tiny) pay dividends
In conclusion, these seven tech giants have been the driver of the solid performance of the S&P 500 in the first quarter of 2023. However, as 2022 showed, they can also be very influential during downdrafts even though these have been rare since 2010. Also, none of these stocks are cheap at the moment, although NVDA and TSLA look sharply overpriced even when taking into consideration their historical growth.
TABLE A: Change in market capitalisation, 2011 to 2022 (annual) and 1Q2023
TABLE B: Change in market capitalisation for period 2011 to 1Q2023 of the S&P 500, the five legacy tech companies collectively, the seven tech companies collectively and for the S&P 500 excluding the seven tech giants
TABLE C: Returns for the magnificent seven over time, using stock prices (not change in market capitalisation), and select valuation indicators (bottom of table)
TABLE D: More discrete quarterly returns (13 quarters, from 1Q20 to 1Q23) of the magnificent seven stocks
[1] This article is focused on the S&P 500, although it is worth noting that the real star as far as US equities was the NASDAQ Composite which delivered a whopping 16.8% return in 1Q23, following a loss in 2022 of 33.1%. [2] Alphabet has two classes of shares both of which are components of the S&P 500. I have just used the market cap of the Class A shares (GOOG), not the Class C shares (GOOGL). It’s slightly complicated and related to a stock split that occurred in 2014, which you can read more about here if you are interested.