Stock prices are going up, which means many investors are… worrying?

(To be honest, it almost seems like some investors spend all of their time worrying.)

In March, as stocks were falling, investors were worried about a bear market. As the recovery began later that month, they were worried stocks were moving up too fast.

Now, investors and analysts are worried that big companies are getting too big. CNBC recently noted:

“Apple, Microsoft, Amazon, Alphabet, Facebook and Tesla now account for almost half (49%) the value of the index, which consists of the 100 largest publicly traded nonfinancial institutions.

The S&P 500 gets 22% of its value from five of those companies, up from 17.5% just six months ago.

The six now make up almost 41% of the Nasdaq, which has more than 2,700 member companies.”

This is an interesting worry to me. Goldman recently shared a chart showing the concern to their clients.

Why This Might Not Matter As Much As You Think…

Looking at that chart, I see a move that’s similar to what we saw in 1999 as tech stocks peaked. That’s what bears are seizing on. But the top five stocks also accounted for more than 18% of the index in the early 1980s. Back then, oil stocks dominated the index.

Source: ETFDB.com

Just look at this historical price chart of Exxon. The oil giant gained almost 500% in the 1980s.

Other oil companies also did well in the 1980s. So did IBM, AT&T, and the other companies that were responsible for the concentration of the S&P 500 in that decade.

In fact, the stock market began an 18-year bull market in 1982 while investors were worrying about how the index was top-heavy.

Based on the history, a relatively large weighting in the top five stocks is either a warning of a market crash or the setup for a bull market.

The next chart confirms the relatively narrow market is not a concern. This chart compares the S&P 500 Index with the equal-weighted S&P 500 Index. In the equal-weighted index, each stock carries the same weighting; that index has slightly outperformed the cap-weighted index where the top five holdings account for 22% of the index.

What Really Matters

Simply put, the data doesn’t support the worry that the relative top-heaviness of the market is a prelude to a crash.

Last week, I explained that I am bullish on the index, and I noted that earnings would be a catalyst for the next big move in stocks. So far, about a quarter of the companies in the S&P 500 have reported results for the most recent quarter.

I expected a strong quarter relative to expectations. And so far, that’s what I’m seeing. With 26% of companies in S&P 500 reporting, 81% beat EPS expectations. That’s well above the five-year average of 72%.

On average, earnings per share is 11.4% above expectations, more than double the five-year average beat of 4.7%. A similar pattern is seen for sales, with 71% of companies beating estimates compared to the five-year average of 60%. Revenue is an average of 3.0% above expectations (five-year average: +0.7%).

By lowering estimates, analysts have done all they can do to help companies. I believe we will continue to see better-than-expected earnings reports for the next few weeks and higher stock prices as optimism briefly displaces the worries of investors.

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