Size Matters

By David Nelson, CFA CMT

Earnings are about to get real as some of the largest companies on the planet are set to report. It’s time for these Mega Cap giants to live up to their safe-haven image buoyed by fortress like balance sheets and secular growth trends that should protect them in times of tightening financial conditions.

Alphabet (GOOGL), Microsoft (MSFT), Amazon (AMZN) and Meta (META) all report this week with the mother of all Mega Caps Apple (AAPL) bringing up the rear next Thursday.

The excitement over ChatGPT and what it means for Microsoft’s Bing in taking market share in search from Alphabet is probably premature, but you can bet it will be a focus for analysts on the conference call.

When you talk to venture capitalists, they are clearly excited about AI and large language models often referring to the speed of innovation. They point to the introduction of personal computers, the internet and then mobile. AI in the  venture world is the next big thing.

I suspect that’s true but in the meantime these companies still have to deliver the goods in a cyclical world where advertising and even technology spends are lean and mean.

No question big has been better this year and the chart above goes right to the heart of what’s driven index performance in 2023.


Bloomberg Data

Look at Mega Caps (MGK) vs the S&P 500 (SPY) and the S&P 500 Equal Weighted Index (RSP). Everyone knows that large cap tech makes up a substantial portion of the S&P. In fact, Apple and Microsoft alone make up more than 13%. But in the world of Mega Caps that isn’t even close. Apple and Microsoft are a 30% weight.

S&P 500 vs % of stocks trading above their 200-day moving average

Bloomberg Data

When you drill down further you can see where the performance separation occurred.

In early February when stocks last reached these levels most were participating. You could see that in a comparison of the S&P 500 on top and the % of stocks trading above their 200-day moving average on the bottom that they were in lock step showing broad participation.

After the March pull back the S&P 500 regained the high ground but the % of stocks above their 200-day didn’t get back to previous levels. Market leadership was starting to narrow.

In the Equal Weighted Index every stock gets just a 0.2% weight and probably speaks to why RSP is up less than 3%.

Like I said at the top, it’s game day. Time for these companies to prove they are worth their $Trillion Dollar price tags.

*At the time of this post some funds managed by David were long AAPL, GOOGL, MSFT and META