Five-hundred companies make up Wall Street's most widely used measure of the stock market's performance: the Standard & Poor's 500-stock index. If it were not for just six of them, the benchmark would be down this year.
Thanks to these six high-flying stocks -- including Apple, which on Wednesday became the first company to be valued at $2 trillion -- the S&P 500 has powered through the coronavirus pandemic to gain almost 5% and set a record.
Along with Apple, the overachievers -- Facebook, Amazon, Netflix, Microsoft and Google's parent, Alphabet -- are household names that have leveraged digital expertise to prosper in the new, socially distanced reality. Through Tuesday, these six stocks collectively were up more than 43% this year, while the rest of the companies in the index together lost about 4%.
"These are sound companies that have been able to grow their earnings," Ed Yardeni, a prominent investment strategist with Yardeni Research, said of the big tech stocks. "They've benefited from delivering goods and services in the pandemic. These are the companies at the very epicenter of booming demand."
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The market's growing reliance on a handful of technology industry heavyweights, however, underscores a societal dominance that may be distorting investment signals, spawning a winner-take-all economy and warping political debates, critics have said. As the tech-dependent S&P 500 roared back from its pandemic crash earlier this year, these companies faced growing political opposition, including the threat of regulatory action in the United States and Europe aimed at curbing their influence.
"The regulatory environment next year is going to be brutal for these companies. It doesn't make any difference who the [U.S.] president is," said Roger McNamee, co-founder of Elevation Partners, a Silicon Valley private-equity firm. "The issues facing these tech companies are becoming more serious all the time. And the market may not be able to count on them."
The outsize role played by these digital stars also creates risks for individuals trying to save for retirement. Investors have more than $1.1 trillion in mutual funds designed to mimic the S&P 500's performance. With the stocks Yardeni dubs "the Magnificent Six" accounting for more than one-quarter of the index's value, investors who think they are buying a diversified slice of the broad U.S. stock market are actually making a concentrated bet on companies that share many attributes, analysts said.
"It's a big headache for investors," Yardeni said.
But with most other stocks struggling through the pandemic's economic wreckage, investors are left with little choice. Inthe stop-and-start nature of some states' reopenings and signs that the economic recovery may be plateauing, these companies have posted the most reliable business results.
On July 30, Amazon reported profit of $5.2 billion in its most recent quarter, topping analysts' expectations, as online grocery sales tripled from the same period in 2019. The company's shares have gained more than 70% this year. (Amazon chief executive Jeff Bezos owns The Washington Post.)
Likewise, Netflix last month said its earnings had ballooned to $720 million, up 165% from the same period in 2019. And Facebook, which has seen its shares rise by more 25%, reported its quarterly profits had nearly doubled to $5.2 billion.
"The dependence on such a small number of megacap stocks is not a healthy sign for the markets or the economy at large," said Michael Farr, chief executive of the investment firm Farr, Miller and Washington. "It's hard to determine what will knock the halos off these companies' heads. My best guess is that it will take a more definitive improvement in the economic growth outlook or rising interest rates."
The six companies' success reflects their global footprint as well as a modern economy that is rapidly growing more technology-centric.
Although companies like Facebook, Google, Microsoft and Netflix are considered quintessential American success stories, they each derive a greater percentage of their revenue from overseas operations than does the typical S&P 500 company, according to Barry Ritholtz, a New York investment manager. Only Amazon relies on North America for a disproportionate share of its total sales.