Big Tech Companies Add Risk to US Stock Market

Post by : Monika

Photo: AP

In recent years, the U.S. stock market has been rising fast. But much of that growth is driven by just a handful of giant technology companies. These few firms are so powerful that if they start losing value, the whole market could fall. This is a concern that is getting more attention now during earnings season—the time when companies share how much money they made and what they expect next.

Who Are the "Megacaps"?
The companies leading this wave are called the “Megacaps” or sometimes the “Magnificent Seven.” They include:

• Alphabet (Google’s parent company)

• Apple

• Amazon

• Meta (Facebook’s parent)

• Microsoft

• Nvidia

• Tesla

These seven giants now make up nearly one-third of the value of the S&P 500, which is a major stock market index. This means that if one or two of them have a bad quarter, it could hurt the whole stock market a lot.

Why Is This a Risk?

• Too Much Influence from Few
  When so much of the market depends on a small number of companies, even a small drop in their stock prices can send shock waves through the whole market. Investors who own funds based on the S&P 500 may think they have many stocks, but they really depend heavily on these few—making their portfolios less safe than they believe.

• High Prices for Megacaps
  These companies are more expensive than the rest of the S&P 500. One measure, called the price-to-earnings ratio, shows the top 10 stocks in the index average about 26, while the rest of the index averages around 20. That means these megacaps need to keep growing fast to keep their high prices justified.

• Record Influence of a Single Company
  A single company, Nvidia, now makes up about 7.8% of the S&P 500 index—more than any company has ever held. That’s even bigger than Apple at its peak. A single stock holding such weight can swing the entire market.

How Did This Situation Happen?
Technology stocks have grown strongly in recent years. Many people think these big tech firms are the future, especially because they lead in cloud computing, artificial intelligence, and online services. The S&P 500 has gone up more than 60% since the end of 2022—twice as much as an alternate version of the index that treats all companies equally.

Thanks to trade deals and a strong economy, even after tariffs and slowdowns, the market has kept climbing. But this climbing has been driven largely by those few top firms.

What Happens During Earnings Season?
Earnings season is when public companies report their profits and future plans to investors. With so much of the market tied to a few firms, everyone watches their earnings closely. Alphabet and Tesla are among the first to report in this cycle. If they report strong profits and good news, the market might keep rising. But if they miss expectations, the impact could be significant.

Michael Reynolds, a financial strategist, warns that disappointment from even one of these leaders could cause big trouble for investors whose money depends on these megacaps.

The Tech Bubble Comparison
The current situation is drawing comparisons to the dot-com bubble of the late 1990s and early 2000s, when technology stocks got very expensive. Today’s tech companies are also highly valued, with technology making up nearly 34% of the S&P 500—higher than during the dot-com peak. That’s a warning sign but not a perfect copy. These companies now have real earnings and strong businesses instead of just promises.

Still, there is a risk that overconfidence or poor news could cause a sharp drop—a "correction."

What Investors Should Do
Experts suggest that investors should think about how much they rely on these big names. Even if you own an S&P 500 index fund, you might not be as diversified as you believe because one-third of the index comes from just seven firms.

Here are some steps investors might take:

• Consider smaller or mid-sized companies that are less tied to tech trends.

• Use equal-weighted index funds which give each company the same importance rather than based on size.

• Watch the biggest firms closely because their performance now affects many other investments.

A Balancing Act for the Market
Right now, the U.S. stock market is doing well, setting record highs. But with so much riding on a small number of companies, it has become more vulnerable. A stumble by one of these tech giants could have an outsized impact, affecting millions of investors.

While tech companies continue to innovate and grow, the rest of the market may need time to catch up. Analysts think that over the next year or two, smaller companies might begin to share in the market's success. But until then, the system remains fragile due to its top-heavy nature.

Lisa Shalett from Morgan Stanley warns that these powerful firms are expensive and the market might be overly reliant on them.

What Lies Ahead?

• Keep an eye on earnings from top tech firms—especially the start of the cycle.

• Watch for signs that smaller and mid-sized companies are gaining strength.

• Track how much money is flowing into index funds versus actively managed or balanced portfolios.

Investors need to ask themselves: "Can these top few firms keep driving the market alone, or does the rest of the market need to join in to make the rally sustainable?"

Final Thoughts
The U.S. stock market is facing its most top-heavy moment in decades. With a few tech giants behind most of the growth, the market may be at risk if they falter. During earnings season, the power of these megacaps will be tested. Whether the rest of the market can step up will determine for how long the rally can last.