IT Domination Marks a New Phase

Observation 69:

June 30, 2023

In June 2015, our first Under the Hood publication started a conversation about the content label on your S&P 500 or bond index fund or any index fund, for that matter: what you thought was in it versus the actual composition. The series’ impetus was the arrival of a new phase for indexation: by amassing so much AUM and ever-increasing inflows, it ceased to serve its original function of passive participation in markets, and instead began to influence the composition of the indexes themselves.

That was a debate. Today it’s not. Then, IT companies were two of the S&P 500 Top 10; today, they’re the largest seven. They are now 28% of the S&P 500; in 2015, the Top 10 amounted to only 17%. This marks a new phase for the index, with a new set of factors impacting its character. We’ll start with the extreme concentration at the top of the index, and some touchstones of valuation versus the law-of-large-numbers limitation on the growth prospects of these companies, which is now showing up in revenue and earnings figures.

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