Is a trillion dollar exposure concerning?

Hello Reader, I'm guessing you've probably seen a chart that looks something like the one below.

If you haven't, the message is simple: Five stocks (Facebook, Apple, Amazon, Microsoft, and Google) account for about a quarter of the market capitalization of the S&P 500, which consists of 500 companies. This is because of their respective massive market values. Apple is worth $2.8 trillion, Microsoft is worth $2.4 trillion, Google is worth $1.8 trillion, Amazon is worth $1.6 trillion, and Facebook is worth $876 billion. For some context, the 20 smallest companies in the S&P 500 are each worth less than $10 billion. The idea that 1% of the companies in the index account for about 25% of the total market value is scary for some investors. But should you honestly be worried? Two things to consider: First, there isn't much evidence that shows a relationship between market concentration and forward market returns. Second, market concentration isn't unusual. In fact, companies used to represent even bigger shares of the market back in the day. AT&T was 13% of the total U.S. stock-market value back in 1932. Another important consideration is that ungodly earnings prop up these valuations. While these so-called FAANG companies account for 1% of the names in the S&P 500, they account for a whopping 14% of the index's earnings. Like the S&P 500, the biggest five stocks in the U.S. market attract raised eyebrows because of the trajectories of their prices. But a closer look at things like business diversification and earnings show that these concerns may be a bit overblown. If you have the capital available, now might be a good time to consider sinking your teeth into some of these FAANG stocks.

Andrew Graham Editor, Silver Ridge Market Report

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