Features | Asset allocation | 9 Mins Read | by
The S&P 500 has outperformed the FTSE 100 since the bear market hit its low in March 2009. This has been driven by US technology stocks and less exposure to low quality sectors.
In 2006, the five largest US companies were Exxon Mobil, GE, Microsoft, Citigroup and Bank of America. Two banks, an oil company, an industrial and a software business.
It is perhaps no surprise that the S&P 500 tanked during the global financial crisis. The five largest US companies today are Apple, Microsoft, Alphabet, Amazon and Facebook.
The US equity market has moved from old economy to new economy stocks.
The five largest companies in the FTSE 100 are Royal Dutch Shell, Unilever, HSBC, BP and AstraZeneca. Two oil companies, a bank a pharmaceutical and a consumer staples group.
The FTSE 100 continues to be driven by old economy stocks.
Top five stocks in the S&P 500 and the FTSE 100
Source: SharePad and The Four, Scott Galloway
An earlier article I did on a similar theme can be found here:
The FTSE 100 index and the S&P 500 index delivered similar returns from 1984 to March 2009 (excluding dividends). But from March 2009, the S&P 500 has meaningfully outperformed the FTSE 100.
The two blue-chip equity markets appear to have decoupled.
The S&P 500 total return index has increased by 313% from the close on 3 June 2009. The FTSE 100 total return index has increased by 147% over the same period.
FTSE 100 and the S&P 500 (excluding dividends) from 1984
FTSE 100 and S&P 500 total return indices from 3 June 2009
The sector exposures of the S&P 500 and the FTSE 100 are markedly different.
Information technology accounts for 22.46% of the S&P 500 but makes up only 0.95% of the FTSE 100.
Information Technology is the largest sector in the S&P 500 and the smallest sector in the FTSE 100. This fact alone speaks volumes.
The United States has created world leading IT businesses like Microsoft and Apple. The UK has had occasional successes but they have more often than not been taken over by overseas companies. Chip designer ARM was taken over by SoftBank.
The S&P 500 IT sector had become so large that Standard & Poor's created a new sector in September 2018. Facebook and Alphabet were in the IT sector and are now listed in the new S&P 500 communication sector.
Another key difference is that energy and materials accounts for 26.18% of the FTSE 100 and only 7.14% of the S&P 500. Both sectors are low return, low growth and cyclical.
The FTSE 100's two largest sectors are financials and energy at a combined 35.25% of the market. The two largest S&P 500 sectors are information technology and health care at 36.25% of the market.
iShares S&P 500 and FTSE 100 ETF breakdowns
The big five: Apple, Microsoft, Alphabet, Amazon, Facebook
Apple, Microsoft, Alphabet, Amazon and Facebook account for 16.4% of the S&P 500 index. Microsoft and Apple initially capitalised on the growth of personal computers and are now 44 and 43 years old respectively.
Amazon is 25 years old, Alphabet is 21 years old and Facebook is only 15 years old. The largest FTSE 100 stock, Royal Dutch Shell, is 112 years old.
The US has created new companies that have pushed the S&P 500 forward.
A mark of the robustness of a company's position is how its competitors have fared. Strong business franchises tend to see new competitors beat a hasty retreat.
Apple generates the bulk of global smartphone profits and operates a duopoly alongside Android. Amazon's attempt to launch a smartphone ended badly with the Amazon Fire Phone lasting just over a year.
Microsoft dominates in the corporate environment with the Windows operating system and Office. IBM tired to make a success of its OS/2 operating system but it failed to gain traction.
Alphabet is gateway to the internet through its search brands Google and YouTube. They have continued to dominate with Microsoft's Bing search engine making little headway.
Facebook remains the leader in social networking with Google failing to make the Google+ social network a success. Facebook has recently being copying many of the features that are present in upstart rival Snapchat.
The big five and failed competitors
How the four disrupt other companies and sectors
Apple, Amazon, Alphabet and Facebook are disruptive businesses. Their success has led to other firms and industries falling into decline (see Scott Galloway, The Four).
The consumer shift online that they have supported has hit property companies, bricks and mortar retailers, newspaper groups and traditional advertising companies. Many of the old economy stocks in the FTSE 100.
This process may continue. Oil companies are at risk if electric cars take off; banks are at risk from upstart competitors; consumer good companies are under threat as online grocery shopping gains traction.
Why does the US create global leaders?
The United States is the world's largest economy and will remain so for sometime. China may become the biggest market this century but the US will remain the largest economy that is subject to the rule of law.
New US companies have a key advantage versus startups in other countries. They start out by selling into the world's largest rule-based economy.
US venture capital funding is supported by past successes. Entrepreneurs who have sold their companies often spend their time backing new businesses. A number of successful entrepreneurs backed Google.
The information technology sector is one area where the US stands head and shoulders above other countries. Silicon Valley has created a powerful cluster of technology businesses.
When Mark Zuckerberg was trying to get Facebook off the ground, he moved from Boston to California. Apple and Alphabet both started in Silicon Valley.
Globalisation and the internet have made it possible for US businesses to expand abroad at breakneck speed. Google, Facebook and Amazon rapidly became global leaders in the developed world.
US firms also are well placed to understand and expand in the developed world. Emerging market companies generally remain focused on their home nations or regions.
On the qualitative side, it appears that US investors are optimists at heart. Companies that are unlikely to get funding in Europe manage to attract backing in the United States.
The US business climate is favourable with US President Calvin Coolidge once famously saying, "The business of America is business."
Will the US continue to create winners?
It appears likely that the US will continue to create companies that win on the global stage. It appears that only America has the scope to launch companies like Peloton, Tesla, Uber and Lyft.
While these kind of companies will generally be poor investments, there will be a few success stories. Amazon was viewed as a terrible investment proposition for much of its history.
Corporate failures are unlikely to disrupt the march of the S&P 500. Uber listed at a market value of $82bn, but Apple currently has a market value of $1,167bn.
A few companies of a similar size to Uber could go under without it having a meaningful impact on the S&P 500.
What are the risks?
It is easy to extrapolate the past and this is what forecasters tend to do. We don't forecast an unexpected event disrupting a trend, because unexpected events are unexpected.
The upcoming US Presidential election in 2020 may also see a left-leaning candidate take control. This could lead to an increase in corporation taxes and a challenging business environment.
The big five US tech stocks are also under increasing regulatory pressure. There have even been calls to breakup Amazon, Apple, Facebook and Alphabet.
We could see US markets underperform in the medium-term. The conditions for long-term outperformance, however, should remain in place.
For UK based investors, a rally in the pound would provide a headwind. We have seen this play out in September and October.
US equity market doom-mongers reference the dot-com crash and the global financial crisis. But the S&P 500 is a different beast today, with the five largest companies likely to be resilient.
US equity markets may contain the highest ever concentration of quality companies.
Apple, Microsoft, Alphabet, Amazon and Facebook are tough companies to compete with. They are better placed to withstand a major downturn than the five largest S&P 500 companies were in 2006.
Additional comment below
1) Many thanks to Mello Events
This article is based on a presentation I gave at Mello London on 13th November. Many thanks to the organizers (Anne, David, Georgina and others) for slotting me in.
2) The view of the bears
Equity market bulls and bears are tribal in nature. This means that when expressing one view it is easy to be hit by over 100 counter arguments.
Equity market bears generally point to recession risk and the length of the current bull market. I focus on the stocks that make up equity markets and consider whether they are attractive or not.
Equity markets rise or decline in line with earnings. High quality companies tend to be relatively resilient during downturns.
I tend to be on the bullish side of things because markets go up over the long term.
The question I ask is whether I would want to buy individual US stocks today. The answer is a resounding yes.
Apple, Microsoft, Alphabet, Amazon and Facebook continue to look attractive. There are a host of other attractive US stocks such as Visa and MasterCard.
Gary Schilling recently revealed that his firm is shorting the S&P 500 (interview). It hasn't worked out well so far with the US blue-chip index continuing to hit record highs.
3) The power of buy backs
Apple and Microsoft together make up 8.7% of the S&P 500 and are buying back their shares at a rate of knots. The have so much cash coming in they don't have anything else that can absorb it.
Facebook and Alphabet are also cash generative businesses with growing cash piles. Both companies are likely to increasingly go down the share buy-back route and may introduce dividends.
Amazon is the exception given its willingness to invest in new areas. But the company is likely to soon reach a point where it cannot find ways to deploy its cash.
Apple diluted share count since 2012
Microsoft diluted share count since 2001