The fate of the S&P 500 index — used by investors as a barometer of the health of corporate America and cited by presidents as a measure of how they handle the economy — often boils down to just two companies: Apple and Microsoft.
This means it’s difficult to invest in the US stock market, for example through a 401(k) or retirement plan, and not be heavily dependent on the fate of the two technology giants. More than $15 trillion in assets, from pension funds and endowments to insurance companies, are linked in some way to the performance of the S&P 500 index, according to S&P Dow Jones Indices, with more than 10 cents of every dollar contributed to the index. is allocated up to and including the valuation of Microsoft and Apple.
It’s a phenomenon explained by the way the benchmark is constructed, and it’s amplified by the way technology dwarfs other industries, in the markets and in the economy. And it means that together the two companies can influence the direction of the broad market, sometimes masking the turmoil that has taken place underneath.
Trading in March provides a clear example. Even after the bankruptcy of two regional banks in the United States and the rescue of one global investment bank in Europe a shock through the financial system and sparking new fears about an already fragile global economy, the S&P 500 was on track to end the month about 2 percent higher as of Thursday.
According to data from S&P, Apple and Microsoft accounted for more than half of that profit. Both were seemingly immune to the banking crisis and boosted by fervor over artificial intelligence, with Apple up 10 percent and Microsoft up nearly 14 percent over the month.
It was true even at the height of the frenzy. On Monday, March 13, right after the government seized Silicon Valley Bank and Signature Bank, there were signs of panic everywhere: Several regional banks had their worst day ever in the stock market, with First Republic Bank down more than 60 percent, in conditions so chaotic that many individual stocks halted trading as exchanges attempted to limit the damage.
Outside the stock market Government bond yields plummetedoil prices fell and the dollar weakened, all of which showed that alarms about the economy were ringing on trading desks around the world.
Still, the S&P 500 spent much of the day in positive territory, ending with a barely noticeable drop of 0.1 percent. Credit again goes to Microsoft and Apple, both of which rose enough to counter a 15 percent drop in the entire regional banking sector that day.
It can be shocking to investors to see the index perform so differently than they might have predicted, says Fiona Cincotta, a stock market analyst at StoneX, a brokerage.
“The dynamics of the indices certainly play a role in this,” she said. “Sometimes the markets just do things you don’t expect.”
Much of this comes down to how the S&P 500 is designed. The value is calculated by a measure that takes into account the total market capitalization of a company. It means that the stock movements of the largest companies carry the greatest weight, as even small changes in their value create or destroy billions of dollars in shareholder value.
Apple, at about $2.4 trillion, and Microsoft, at $2.1 trillion, are so large that the two companies combined would be the index’s third-largest sector after technology and healthcare. They would be larger than the energy sector and about the same size as the financial sector.
This influence is the result of a decades-long shift in both markets and the economy since the Internet boom, a change that accelerated after the 2008 financial crisis. Low interest rates introduced after the Great Recession to support the economy made borrowing cheap and pushed investors to seek higher returns from riskier companies, boosting funding and growth for tech companies.
Apple became the first US company to exceed $1 trillion in the stock market in 2018. As its value rose, so did those of its rivals Facebook (now Meta), Amazon, Netflix and Google (now Alphabet) – a group that later became the FANG shares. They helped lift the index to new highs for more than a decade bull market.
This dynamic is not entirely unusual in the history of the S&P 500, although it is extreme, and was exacerbated by the rapid growth of some tech companies during the pandemic. (At the end of 2018, the combined index weight of Microsoft and Apple was lower than Apple alone now.) The previous company to reach Microsoft’s 6.2 percent weight in the index was IBM in the mid-1980s, based on data for the end of each calendar year.
“I don’t think it’s a problem,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “This is what it’s all worth, and if Apple or Microsoft go up or down, there’s a proportional impact because they’re worth more. It’s market driven.”
The S&P also produces an “equal weight” index, where each stock has the same effect on the broader group. In March, the index was 3 percent lower.
Another oft-cited measure of Wall Street performance, the Dow Jones Industrial Average is a price-weighted index that has been criticized for how it highlights companies based on their stock price alone.
And then there are the underlying sectors, which are also tracked by S&P in separate indices. These indices, which tend to show more directly the pain hitting their stock subsets, show that the financial sector fell more than 10 percent in March, while energy stocks fell 1.1 percent and real estate companies fell 4.2 percent. . They also show that other parts of the market, such as utilities, did well.
S&P Dow Jones Indices, which maintains both the S&P 500 and the Dow, has attempted to address the impact of these specific weightings, at least on several sectors. In 2018, it moved Alphabet and Meta out of the technology sector into the communications category with Netflix, while Amazon remained in the consumer goods category with other retailers.
Since then, Meta, Amazon and Alphabet have slowly lost value, while Apple and Microsoft have grown. The tech sector in the S&P 500 has also been bolstered by the emergence of new behemoths like chipmaker Nvidia, which is valued at nearly $1 trillion.
This month, S&P attempted to rebalance the index by moving a handful of big technology-focused companies — such as Visa and PayPal — into the financial sector, but further entrenching the dominance of Apple and Microsoft as the two tech heavyweights.
This of course cuts both ways. In 2022, the S&P 500 fell nearly 20 percent, a drop that would have been much smaller if it weren’t for the technology sector’s poor performance. If Apple and Microsoft had simply been taken out of the picture last year, the index’s loss would have been reduced to less than 1 percent.
For now, analysts see reasons for technology to continue rising.
One reason is the excitement about artificial intelligence. Microsoft has a big interest in it Open AIthe creator of ChatGPT, and many investors foresee that the nascent technology will drive the next phase of growth for both the companies developing the software and the chip manufacturers whose processors power it.
Technology stocks are also benefiting from concerns about the country’s banks, prompting investors to quickly adjust their expectations of rate hikes by the Federal Reserve. The industry is particularly sensitive to interest rates, and if a recession is not imminent, lower rates would boost the industry in the future.
And, analysts said, big tech companies have become havens where investors can wait out the current storm.
“It’s been a big bull cycle for technology,” said George Catrambone, the head of Americas trading at DWS, a fund manager. “I don’t think people are going to give up on that paradigm easily.”