The top five U.S. stocks are headed toward 20% of the market capitalization of the S&P 500, with a value approaching the nominal GDP of Japan, as equity investors flock to the same few trades.
U.S. stocks defied a broader slowdown in global equities in 2019, extending a record decade-long bull run as looser monetary policy by the Federal Reserve drove a return to risk. However, much of the performance was driven by the information technology sector, which returned 50.3% last year, compared with 31.5% for the wider index.
While the market capitalization of the S&P 500 increased 27.3% to $26.76 trillion in 2019, the value of the top five stocks — Apple Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc. and Facebook Inc. — rose 45.4% to $4.9 trillion.
At the end of 2019, the top five stocks accounted for 18.4% of the S&P 500's market cap, up from 16% a year earlier. That trend has continued into 2020, with those companies now making up 18.9% of the index.
"Everyone went back into the same old equities," said Sean Darby, global head of equity strategy at Jefferies Group. "The breadth of the market is very poor."
While comparisons to the dot com bubble of the turn of the century do not hold much water — all of today's big five are highly profitable companies — the concentration of value in such a small part of the market does still carry risks.
It makes the benchmark U.S. stock index a less useful proxy for the economic health of the country. It also leaves much of the country's wealth stored in a sector that is facing growing political pressure in the form of several antitrust investigations.
"The biggest risk to markets is yourself," said Darby. "You're all on one side of the trade."
Apple was the best-performing stock among the top five last year with a gain of 86%, followed by Facebook with 57%, Microsoft with 55%, Alphabet with 28% and Amazon with 23%.
All five companies have continued to see share-price growth at the beginning of 2019 with Alphabet's market cap rising above $1 trillion on Jan. 16 to join Apple and Microsoft in the trillion-dollar club.