The $1 Trillion Market Cap Race Is a Zero Sum Game

(Bloomberg Opinion) -- Amazon.com Inc. said Thursday that it bought online pharmacy company PillPack. It also said it was starting a program to recruit local entrepreneurs to make “last mile” package deliveries. Amazon's share price promptly soared, pushing its stock market value up by $20 billion to $825.6 billion on the day. Alternatively, Walgreens Boots Alliance Inc., Rite-Aid Corp., Cardinal Health Inc., AmerisourceBergen Corp., CVS Health Corp. and Walmart Inc. saw their values drop by a collective $17.5 billion, while FedEx Corp. and United Parcel Service Inc. declined $3 billion.

This seemingly zero-sum outcome underscores how disruptive technology companies are taking market capitalization away from legacy businesses and adding it to their own. They have been so successful that a handful of these technology companies are rapidly closing in on becoming the first to reach $1 trillion in market capitalization on a sustainable basis. Nothing in the last 50 years has seen a period like the current one. As the chart below shows, Petro China briefly became the first company with a $1 trillion stock market value a decade ago, but that was a unique situation.

The next chart shows the impact the so-called FAANMG stocks — Facebook Inc., Apple Inc., Amazon, Netflix Inc., Microsoft Corp., and Google parent Alphabet Inc. — have had on the S&P 500 Index since November 2017. These six stocks alone pushed the S&P 500 up 2.66 percent. The other 494 stocks were collectively down 0.40 percent. Overall, the S&P 500 was up 2.26 percent.

This is not just a U.S. phenomenon. The next chart adds Twitter Inc., Tesla Inc., Alibaba Group Holding Ltd., Baidu Inc., Nvidia Corp. and Tencent Holdings Ltd. to the FAANMGs to form a group we call “The Disruptors.” Since the start of November, this group pushed up the MSCI World Stock Index by 1.61 percent. Every other stock on the planet was collectively down 1.07 percent. Overall the MSCI was up just 0.54 percent.

How big are these 12 stocks? They have a combined market cap of more than $5 trillion and are approaching the size of the Japanese stock market, the third-largest in the world behind the U.S. and Chinese markets. The six FAANMG stocks are just under $4 trillion in value, more than the U.K. stock market, which is the fifth-largest in the world.

It's unusual for a handful of stocks to get this big and have this much influence on the major averages. In other ways it is not. The next chart shows the percentage of the S&P 500's market cap that is due to the five largest stocks. In 1964, the top five stocks accounted for more than 25 percent of the index. That percentage fell steadily into the early 1990s, bottoming at 10 percent.

In that light, it would not have been unusual for the top five stocks to account for a large portion of the move in the overall index. As the next chart shows, the largest stock regularly accounted for as much as 9 percent of the market in the late 1960s. For comparison, today's largest stock, Apple, accounts for 4.2 percent of the S&P 500.

Until recently, the five largest stocks were often in vastly different industries. As the chart below shows, prior to the recent Disruptor explosion, the five largest stocks of a single industry never accounted for more than 9 percent of the S&P 500. That changed after 2013, probably due to the mass adoption of fast LTE mobile phones. The Disruptors account for a record industry concentration of 15.4 percent of the S&P 500.

Many on Wall Street joke that if Amazon sets its sights on your industry, get out while you can. And if Amazon is not involved in your industry, it must not be worth their time. There is an element of truth to any good joke. In more than 50 years of data, we have not seen this kind of zero-sum trading pattern in markets. The 12 Disruptor stocks are growing by leaps and bounds while the rest of the market treads water.

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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