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How tech dominates the US stock market

We take a closer look at some emerging trends across the pond, what's driving stock markets in the US and what this could mean for investors.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

In August, Apple became the first publicly traded US company to be valued at $2trn – cementing tech stocks’ place as leaders of the pack when it comes to the US stock market. It took 40 years to achieve a $1trn valuation, but just two more to double in value after reaching that landmark. In part, that rise is thanks to the tailwind enjoyed by growth stocks.

This article isn’t personal advice. If you’re not sure if an investment is right for you, please seek advice. All investments fall as well as rise in value so you could get back less than you invest. Past performance is not a guide to the future.

Growth versus value

For some time now, we’ve seen growth focused companies outperforming value. Lots of value-focused fund managers have had a tough old time of it, often lagging well behind.

This trend has been especially prominent in the United States, where we’ve seen a small number of companies delivering exceptional performance and becoming ever larger parts of the market – particularly in recent months.

The widening gap between value and growth styles has continued to increase. You can see in the graph below the difference in returns investments in the Russell 1000 Growth and Russell 1000 Value indexes would have delivered over the last 10 years. It’s a sizeable 275.3%.

Chart showing 10 year US Value vs Growth stock market returns

Past performance isn’t a guide to future returns. Source: Lipper IM to 31/07/2020.

Sector shift

A decade ago Financials and Energy stocks accounted for a combined 26.7% of the index, compared with just 12.2% now. A significant shift.

Of course the biggest move over the last 10 years has been the surge in the weighting of the Technology sector. The sector’s growing weight in the index means US market returns now rely even more on the biggest tech companies.

Recently we’ve seen their balance sheet strength, and the increased demand for their services, reflected in their share prices. But there’s a danger that if the market loses confidence in these companies it could drag down the whole market.

Charts showing sector breakdown for the S&P 500 in 2010 v 2020

Source: Bloomberg to 20/08/2020.

No one can predict the future, but one thing that’s certain is that the composition of the index will continue to evolve. As the economy and consumer preferences change, so will the value of the companies and their weight in the index.

Is the US top heavy?

At the time of writing the five most valuable companies in the S&P 500 index, so those with the biggest weightings by market capitalisation, are Apple, Microsoft, Amazon, Facebook and Alphabet. They now account for an incredible 22% of the S&P 500 and combined are worth roughly $6.7trn.

Chart showing top 5 US companies by stock market value

Source: Bloomberg, 20/08/2010, 21/08/2020.

Fundamentally these companies are disruptors and have driven huge changes in the industries they operate in. From the way Amazon has disrupted traditional brick and mortar retail to the way Apple has changed the way consumers interact with music even before their revolutionary smartphones.

These companies haven’t rested on their laurels, they’re constantly adapting and innovating to bring the next product or service to market.

This means they face lofty expectations from the market.

Lots of businesses have suffered through lockdowns with trading restricted and revenues evaporating, but not all. Consumers have become even more reliant on these five mega companies for communication, connectivity, online shopping and more.

Looking for ideas?

Investing in these funds isn’t right for everyone. You should only invest if the fund’s objectives are aligned with your own, and there’s a specific need for the type of investment being made.

Make sure you understand the specific risks of a fund, and that any new investment forms part of a diversified portfolio.

We’ve given some ideas for your interest, but they aren’t a guide to how you should invest. Ask us for advice if you’re not sure an investment is right for you.

Baillie Gifford American

The fund’s growth style aims to benefit from investing in exceptional growth businesses and holding them for long enough to reap the rewards. The managers spend a lot of time thinking about industry dynamics and the powerful trends developing across the economy to ensure they’re investing in companies on the right side of them. The fund can invest in smaller companies, and is a made up of a smaller number of holdings, both of which increase risk.

More on Baillie Gifford American, including charges

Baillie Gifford American Key Investor Information

Artemis US Smaller Companies

The fund aims to deliver long-term growth by investing in higher-risk smaller companies based in the US. The manager looks to invest in companies that he thinks have a 2:1 ratio of upside potential versus downside risk from the current market price. The fund’s concentrated portfolio means each holding can have a big impact on performance, but it can increase risk.

More on Artemis US Smaller Companies, including charges

Artemis US Smaller Companies Key Investor Information

Legg Mason IF Royce Smaller Companies

This fund aims to deliver long-term growth by investing in unloved higher-risk smaller companies in the US. The fund offers a differentiated approach to a lot of other US equity funds which means it has the potential to perform quite differently.

More on Legg Mason IF Royce Smaller Companies, including charges

Legg Mason IF Royce Smaller Companies Key Investor Information

Legal & General US index

This fund aims to track the performance of the FTSE USA index by investing in a broad spread of US companies, across various sectors of the economy. It’s a simple way to access the largest stock market in the world and invests in over 600 companies.

More on Legal & General US Index, including charges

Legal & General US Index Key Investor Information

Read more

Explore our Investment Times October 2020 edition for more articles like this.

See all articles

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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