Is the SP 500 Just Another Large-Cap Growth Fund ?

(This blog post could be classified as – somewhat like the Jerry Seinfeld show – a post about nothing. I’m just thinking out loud about the popularity of indexing and what clients miss in the “index game”.)

Strategas Partners, the highly-regarded and well-respected macro research firm out of New York, came through Chicago 6 – 8 weeks ago and one of the theme’s of the presentation was “Have we reached peak passive?” in terms of the individual investor’s (and presumably some institutional) preference for index funds and ETF’s.

More ETF’s and “style-box” funds are being used for my own clients than ever before but large-cap stock picking hasn’t been abandoned for this very reason.

What fascinates me is that when I talk to clients about index funds or ETF’s is that they don’t see these vehicles as baskets of stocks but rather some kind of “magic bullet” solution to investing.

Here is the top 10 stocks in the SP 500 as of 12/31/1999 with their respective market cap weights:

  • 1.) Microsoft: $604 billion
  • 2.) GE: $507 billion
  • 3.) Cisco System: $306 billion
  • 4.) WalMart: $308 billion
  • 5.) Exxon: $278 billion
  • 6.) Intel: $274 billion
  • 7.) Lucent: $234 billion
  • 8.) IBM: $194 billion
  • 9.)  Citigroup: $187 billion
  • 10.) America Online: $170 billion
  • Total mkt cap: approximately $3.1 billion

Commentary: the pinnacle of the Tech bubble in the late 1990’s, early 2000’s saw 6 Tech companies in the Top 10 market cap positions in the SP 500, two of which – for all practical purposes are not around 10 years later (Lucent and AOL). The largest so-called Industrial component, GE, was nothing more than a bank, with a few Industrial businesses bolted on to it.

Source: ETFConnect

By 2002, here is how the “Top 10” composition of the SP 500 had changed:

  • 1.) Microsoft: $276 billion
  • 2.) GE: $242 billion
  • 3.) Exxon: $235 billion
  • 4.) WalMart: $223 billion
  • 5.) Pfizer: $188 bl
  • 6.) Citigroup: $178 billion
  • 7.) Johnson & Johnson: $160 billion
  • 8.) AIG $151 billion
  • 9.) IBM: $131 billion
  • 10.) Merck: $127 billion
  • Total mkt cap: $1.9 trillion

Source: ETFConnect

Commentary: In just 2 years, the Top 10 components had lost $1 trillion in market cap in total, and the number of Tech companies within the Top 10 had fallen from 6 to 2, by the end of 2002. In a more defensive market that we saw in 2000, 2001 and 2002, Health Care names were now 3 of the Top 10 SP 500 components. Microsoft lost over half its value in terms of its market cap and STILL retained the #1 position in the SP 500.

Here are the Top 10 stocks in the SP 500 today (as of 9/28/17)

  • 1.) Apple: $796 billion
  • 2.) Alphabet: $670 billion
  • 3.) Microsoft: $574 billion
  • 4.) Facebook: $596 billion
  • 5.) Amazon: $462 billion
  • 6.) Berkshire Hathaway: $452 billion
  • 7.) Johnson & Johnson: $349 billion
  • 8.) Exxon Mobil: $347 billion
  • 9.) JP Morgan: $336 billion
  • 10.) Bank of America: $267 billion
  • Total mkt cap: approximately $4.1 billion

Source: Morningstar SPY holdings as of 9/28/17

Commentary: what caught my eye about today’s Top 10 composition is that Microsoft, in the #3 position, actually has a smaller market cap today in September, 2017 than its market cap in December, 1999. Microsoft has had 9 stock splits in its history, but only one has occurred since 2000, and that was a 2-for-1 split in February, 2003.

In March, 2000, Microsoft had over 11.2 billion fully diluted common stock shares outstanding, but today – thanks to share repurchases over 17 years, that number has shrunk to 7.8 billion. This is why even though Microsoft’s stock price is trading at an all-time-high, the market cap is lower than in December, 1999. (You could make the case MSFT’s valuation is a lot more reasonable, too.)



From 2000 to 2002, the Nasdaq fell between 80% – 90% in value (check the annual returns here) and yet the SP 500 earnings actual rose from 1999 to 2000 from $50 to $55 per share. (That was a surprise when looking at the data.)

During the Tech crash from 1999 through the end of 2002, here is how actual SP 500 EPS tracked:

  • 1999: $50.82
  • 2000: $55.12
  • 2001: $45.16
  • 2002: $47.94
  • 2003: $55.44

The SP 500 bottomed in March, 2003 coincident with the start of Gulf War II.

Readers might think that this blog is comparing apples to oranges, with the Nasdaq vs the SP 500, but today the SP 500’s top 6 names are all Technology names, it is just that the valuation of the Nasdaq today at 23(x) – 25(x) earnings is far more reasonable today than the 80(x) – 100(x) P.E of the late 1990’s.

The SP 500 is trading today at 17(x) – 18(x) forward earnings vs, the 27(x) – 28(x) from the late 1990’s.

Conclusion: So What’s the Point of the blog post ?

The SP 500 fell 50% from its March, 2000 high to its October, 2002 low and yet SP 500 earnings remained almost flat for the 3 years.

  • P/E expansion / contraction matters
  • Market cap matters
  • Valuation matters

The powerful, secular bull markets like the 1980’s and 1990’s are really driven by P.E expansion. “The market” (so to speak) affords a higher multiple to a given level of earnings growth, particularly if the SP 500 earnings growth is accelerating.

Barry Ritholz wrote a similar article to this one way back in 2012, without my bloviated commentary. Like the well-trained lawyer that he is, Barry simply left the SP 500 rankings out there for readers to digest.

Bottom line: after the 50% correction in the SP 500 in the early 2000’s, i began to think of the SP 500 as just another large-cap growth fund. The best companies will rise to the top of the SP 500 (for various reasons, as a growth-oriented market like the late 1990’s or as a defensive market like 2000 – 2002.)

Josef Schumpeter, the Austrian economist for whom the term “Schumpeter’s creative destruction” was coined may describe the process the best, for both the SP 500 and the US economy, and the link between the two is far more “causal” than retail investors probably realize.

Excuse the long-winded commentary. With indexing, just know what you own in the index.

Thanks for reading.




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