Thursday was a rough day in the markets, with a fierce sell-off and S&P 500 down >1%.  The carnage was in the mega-caps and there is a growing chorus that the S&P 500 is distorted by the outsized market cap of the Big 5 tech names.  We have seen multiple citations of the "craziness" of this market as the top 5 are now 22% weight of the S&P 500.  We discuss this at length below, but we just don't see the bubble. The top 5 stocks (AAPL, MSFT, AMZN, FB, GOOG) are 18% of earnings and like >80% of 2020 EPS growth.  So, their 22% market cap share does not seem so out of line with their nearly 20% net income share.  After all, aren't these franchise cos?

It looks like this is the week that definitely saw US case surge finally plateau (and hopefully turn into a decline this weekend).  It looks like all the mitigation measures taken in the past few weeks are working.  And the White House is now endorsing mask use.  Thus, we see the economy risks diminishing. 

And as we have commented in the past, as the national disease panic fades, local behavior recovers.  In fact, our survey of San Diego CFA members conducted this evening (see the last bullet) shows how CFA members' perception of national trends governs their own personal decisions. 

This is why we are not too alarmed at seeing economic data stall in the past week.  Virus spread started accelerating in early June and the media and skeptics and policymakers have been quite alarmed -- appropriately, actually.  But this had the effect of dampening economic momentum.  If cases are now peaking, economic momentum will resume.  And our policy strategist, Tom Block, expects a stimulus package passed and signed by early August.

Thus, the set up for stocks, in our view, is extremely attractive right now:

- disease is plateauing (again)
- economic momentum should recover
- fiscal stimulus coming
- sentiment remains very negative (see San Diego CFA survey below)
- $5T cash on sidelines

And many are ringing the bell (top of market).



STRATEGY: The Top 5 stocks earnings share = market cap share.  Not a "bubble"
5 sentences on the reminisces of the 1999 dot-com bubble, my early career experience...
I was a wireless analyst in 1999, working at Salomon Brothers, which at that time, was the "firm" for wireless and telecom IPOs and investment banking.  We had Jack Grubman running the Telecom group and he was a giant among short-statured telecom research franchises.  So, suffice it to say, I was a ground zero witness to that dot-com bubble.  The dot-com bubble fueled a "get rich quick" mentality as tech IPOs saw tremendous gains, any renaming to "internet" caused a surge and investors were funding and throwing money at any new telecom/internet idea.  I don't have enough space in this daily commentary to describe the mania that was prevalent then, but one of the realities is this environment created a mismatching of pricing because:

- Companies that raised money in IPOs use that money to invest/fund/buy products from other start-up --> pyramid-like
- Venture funds were returning 100X-500X, so new funds were funded with massive profits from legacy funds -->  pyramid-like
- Internet was growing so fast, but capital requirements so high, companies that were growing were losing tons of $$$ --> shift away from EPS

Bottom line - equity prices rose faster (straight up) than earnings (straight down).  So, there was a growing and visible disconnect between asset prices and EPS.  This was the bubble.  If these dot-com companies were highly profitable, nobody would have called it a bubble.

Fast forward --> 2020.  Those seeing "echoes of 1999"
Over the past few weeks, there has been a growing chorus of investors calling this equity market ultra concentrated, pointing to the outsized gains of the top 5 largest stocks in the S&P 500.  In fact, even this morning, there were a few clients who shared with me this email from a broker.  The message is all the same:

- the S&P 500 market is "unhealthy" because the top 5 stocks are too big
- many even point to this mirroring the 1999 "dot-com" bubble

COVID-19 UPDATE: S&P 500 Mega-caps not a bubble as Top 5 earnings share = top 5 market cap share. San Diego CFA poll shows CFA holders bearish.
An FSI Macro, or FSI Pro subscription is required in order to access this content.
If you are already a member at FS Insight, please If you don’t have a subscription to FS Insight yet, you can sign up below.

We accept crypto via BitPay for yearly subscriptions.

Choose one of our yearly plans to save nearly 15%

    • Macro + Crypto
      FSI Pro
      The Complete Package
      FSI Macro + FSI Crypto
      from
      $
      249
      /mo
      billed anually
      First Month Free!
    • Macro
      FSI Macro
      from
      $
      199
      /mo
      billed anually
      First Month Free!
      What's included?
      Webinars and Media
      Webinars
      We host over 12 LIVE webinars per year with our research team and high-profile special guests. Incredible value and market insights!
      Weekly
      Coming Soon
      Fireside Chats
      Weekly interviews with our research heads about market opportunities and important updates.
      Research
      Weekdays
      Tom Lee's First Word
      The best market research out there -- on a near-daily basis.
      On market events
      Tom Lee's Intraday Word
      These are released periodically after crucial market developments.
      Daily
      Daily Technical Strategy
      Daily commentary on market trends and short term opportunities.
      Weekly
      Wall Street Whispers
      Exclusive insights based on discussions with institutional clients.
      Weekly
      Quantitative Strategy
      Quantitative market research utilizing industry-leading analytical methods.
      Weekly
      US Policy
      Weekly update on developments in Washington DC and how they may impact Wall Street.
      Weekly
      Weekly Roadmap
      Weekly summary of market events and updates on our key theses.
      Earnings season
      Earnings Daily
      A multi-faceted update of earnings developments.
      Updated bi-weekly
      Signal From Noise
      Highlights timely market themes and sectors with corresponding stocks, cutting through the day-to-day market “noise” for a distinct perspective.
      Stock Lists
      Updated quarterly
      Granny Shots
      Thematic investment stock picks that aim to outperform the S&P 500.
      Updated monthly
      Brian’s Dunks
      Single stock pics that are poised to outperform the index by leveraging sector outperformance and earning revisions strategies.
      Updated monthly
      FSI Sector Allocation
      A sector allocation strategy that is designed to outperform the S&P 500 while taking minimal risk.
      Updated monthly
      Factor Strategy
      List of ETFs based on quantitative models that should outperform the S&P 500 on a monthly basis.
      And More!
      FSI Academy
      Our main goal is to make you a better investor! This series will guide you through key financial concepts and topics in an understandable way.
      Community Questions
      We gather your inquiries and answer them in the most scalable way. Hear directly from our research principals!
      Community Interviews
      Get questions answered directly by our research heads and guest speakers.
      Get access to all the macro research on FS Insight
      First Month Free!
    • Crypto
      FSI Crypto
      from
      $
      99
      /mo
      billed anually
      First Month Free!
      What's included?
      Webinars and Media
      Webinars
      Ongoing webinars exploring crypto opportunities, in depth research, and exclusive research offerings from our team of analysts and leading cryptocurrency firms.
      Weekly
      Crypto Chats
      Digestible videos expanding on important market events and metrics that are shaping cryptocurrency markets.
      Research
      Daily
      Crypto Daily Report
      Stay on top of the crypto markets with macro commentary, technical analysis, and the most relevant news.
      Intra month
      Crypto First Word from Tom Lee
      Hear directly from Tom Lee about important cryptocurrency developments.
      Weekly
      Crypto Technical Strategy
      From Bitcoin, Ethereum and Solana to other coins, our Head of Technical Strategy highlights important price movement to help give you an edge.
      Weekly
      Crypto Weekly
      A must-read summarizing our key thoughts about the crypto market, price action, and developing trends.
      Weekly
      Funding Fridays
      Are you looking for investment opportunities in the crypto space? We explore early-stage crypto opportunities in this note about where the smart money is being invested!
      Weekly
      Coming Soon
      Crypto Events
      Never miss another conference, a high-impact software update, or an event that could be market-moving!
      Intra-month
      Deep Research Reports
      Our consulting business delivers incredible deep research reports to highlight the economics and viability of exciting crypto projects.
      Update daily
      Bitcoin Misery Index
      Keep track of bitcoin sentiment to plan your digital assets strategy.
      And More!
      FSI Academy
      Our main goal is to make you a better investor! This series will guide you through key financial concepts and topics in an understandable way.
      Community Questions
      We gather your inquiries and answer them in the most scalable way. Hear directly from our research principals!
      Community Interviews
      Get questions answered directly by our research heads and guest speakers.
      Get access to all the crypto research on FS Insight
      First Month Free!

More from the author

Disclosures (show)

Want to receive Regular Market Updates to your Inbox?

I am your default error :)