Weekly Update: Eye Opening Chart
Good evening, and welcome to this week’s edition of Stealth Trades!
Here’s a scary chart…
Excluding the top 10 stocks (Nvidia, Apple, Amazon and the usual suspects), the other 490 stocks in the S&P 500 have seen almost no earnings growth since 2022.
For some people, this is alarming. They think the stock market has gone up too far too fast with no fundamental reason.
But nothing could be further from the truth…
You’ve heard me talk about the “theme” of the market and how I like to laser focus on the areas seeing the most strength.
Because guess what? Those are the stocks that ARE seeing big earnings growth or are at least expected to in the coming months.
The 2009-2020 bull market did not take place because the entire economy grew at record pace. GDP only grew at about 2% in each of those ten years. The stock market, on the other hand, gained an average of 13% each year.
How is that possible?
One word… concentration.
Just as the top 10% of earners pay the majority of all income taxes, the top 10% of stocks generate the majority of the profits.
In the 2010-decade, big tech was leading the charge. Facebook, Amazon, Google, Apple and Netflix saw MASSIVE earnings growth. As a result, they saw their share prices and market caps soar.
This meant the companies with the fastest earnings growth were also representing a larger and larger share of the market indexes.
We saw the same thing with Nvidia over the last few years.
In 2021, Nvidia represented just 1% of the S&P 500 index. Then came the AI boom. They have grown earnings at 74% PER YEAR for the last five years. This one stock now makes up a whopping 8% of the S&P 500.
Today, the top 10 stocks control 38% of the index. This is higher than usual, but not as much as you think.
Even as far back as 1880, the 10 largest companies were a quarter of the overall market.
Today that figure is at 38%. But it makes sense…
Globalization has allowed firms to expand worldwide quickly and efficiently. Companies like Google and Netflix can expand across the globe with nothing more than a few offshore server farms to support the load. Everything is digital.
Sky high profits also mean deep pockets, and big tech has been systematically gobbling up its competition for years to grow by accumulation.
If I were to guess, I would bet that 38% figure is higher in ten years, not lower.
I always laugh when I hear someone say they have a concentrated portfolio of 10-20 stocks. Because 9 times out of 10, those are the same 20 stocks everyone else holds – Apple, Alphabet, Nvidia, Microsoft, etc.
You’re not going to outperform the market with those mega cap stocks… you ARE the market.
Personally, I’m glad the growth is only coming from select areas. That’s what gives us our edge. If out of 500 stocks, only 40 or 50 of them delivered all the earnings growth, think about how much better you will do by owning just those?
I don’t want to own the whole market. I don’t want to “ride the index” like every other sucker. I want to be where the action is. I want to be in the fastest growing stocks during strong bull markets and watch those stocks double and triple.
That’s the recipe for a big performance. That’s how you beat the market.
Best wishes for your trading,
