by Maurice (Mo) Spolan, Investment Research Analyst
The S&P 500 closed last week at an all-time high, which re-established a bull market, based on common definitions. The bellwether index eclipsed its February peak in just 126 trading days, which is 10 times faster than the average bear market recovery throughout history. The market bounce has been led by technology stocks, as exemplified by Apple, who, last week, became the first company ever to achieve a $2 trillion market capitalization. While technology companies have been largely unencumbered by the pandemic, CNBC reports that a majority – 62% – of stocks in the S&P 500 remain below their all-time highs. In particular, laggards are concentrated in sectors such as Financials, Energy, and Travel & Leisure, where the greatest economic damage is taking place. The S&P has been able to stage this recovery, despite many companies still struggling, because the index is market cap-weighted, which means that the largest companies have the greatest impact on the index’s price. Presently, the largest constituents are technology companies who, as noted, have benefited from the pandemic, economically speaking.

This phenomenon also helps to explain how the stock market can thrive while the broader economy contracts: the big tech companies have a much greater influence on the price of the S&P 500 than they do on economic output. To illustrate this point in broad strokes, consider that the combined revenue of Amazon, Apple, Facebook, Microsoft and Google amounts to less than 5% of U.S. GDP, while the market capitalizations of such companies account for over 20% of the S&P 500’s value. While U.S. GDP reflects the cumulative output of hundreds of thousands of small businesses, in addition to large technology companies, the stock market more closely tracks the performance of the very biggest corporations.