June 4, 2020

How is the stock market up despite record job loss?

There are some major differences in the composition of the stock market and the economy which have contributed to the dislocation. The largest tech companies – Microsoft, Amazon, Apple, Google, and Facebook – have vastly outperformed the broader market as a result of stay-at-home orders. These firms represent 20% of the S&P 500 Index, yet their combined revenues in 2019 amounted to only 4% of US GDP.

One reason for this divergence is that most stock market indices, such as the S&P 500, are weighted by the market capitalization of their constituents. The more valuable a company, the larger the share of the index weight. This means smaller companies tend to have little stock market representation, even though they account for 44% of US GDP, according to a report from the US Small Business Administration Office of Advocacy.

The S&P 500 index consists of the 500 largest companies in the United States. By way of comparison, Microsoft alone has an index weighting equal to the bottom 336 companies in the index, even among the largest companies in the U.S.


Chart: Refinitiv Datastream and Schroders. Notes: reported global revenues as at FY2019, with broker estimates used for firms yet to report earnings. Market value as at 1st May 2020.
Index data: https://www.slickcharts.com/sp500

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