Almost everyone in America is familiar with the term “S&P 500”. We all know, in a nutshell, it is one of the most popular ways to benchmark the U.S. stock market. Have you ever wondered what the S&P 500 actually is? Why do we use it as a barometer of stock market performance? What does it measure?
The S&P 500 is a measurement tool that tracks 500 different United States based companies and their stock value. The index includes the country’s largest corporations which is reviewed and updated quarterly. As such, they add up the total stock value (market cap) of the biggest companies and only include the value of the top 500. Great idea, right?! I mean, if we can track the 500 biggest companies, then we have a great idea of the state of big business in the U.S.
What makes the S&P unique is that it’s weighted. That means the largest companies have a larger impact on the barometer than the smaller ones. More prosperous sectors of the business world gobble up a larger share of the S&P “pie” than more stagnant areas. Information Technology makes up approximately 30% of the entire index. Consumer staples, on the other hand, make up about 6%.
From a company perspective, Apple is the largest component of the index, comprising about 7% of the entire S&P. Just behind it at 6% is Amazon. Google is at 4%, with Tesla at about 2%. All these are part of the newer information-driven economy, and not older industrial giants. It’s not until number 9 that we find any older company. That company, Berkshire Hathaway, is a far cry from its roots as a furniture store. As a matter of fact, Warren Buffet’s Berkshire owes much of its value to Apple itself, whose stock makes up the biggest single piece of Berkshire Hathaway’s value.
After accounting for the few true mega-cap stocks at the very top of the index, the proportionate representation falls off precipitously. Stocks hovering around the 100-mark include PNC Financial, John Deere, Moderna, and others. PNC, which is the 7th largest bank in the country, sits at about .2% of the index and comes in ranked at #100.
If John Deere, Altria, Lockheed Martin, PNC, and Moderna were to all simultaneously go instantly bankrupt, the S&P would lose about 1% of its value. If Apple were to fall by 15%, then the index would lose the same amount.
The S&P 500 is a very handy tool. Many investors use funds that are designed to track its performance. Because it’s weighted by market cap. That aspect, though, leaves it not very well diversified. The top ten stocks make up approximately 30% of the entire index. Sometimes moves in the top two or three companies can make the entire index behave differently from the broader market.
The bottom line is this: while the S&P 500 is a great tool, it is one of many that help gage the performance of the stock market. If your portfolio doesn’t move alongside this index, that’s not always bad. A well-built investment plan generally doesn’t have the same allocation as the index and isn’t as exposed to the whims of just a few companies. *
All data collected as of January, 2022 per Finasco. Weights in the S&P 500 change regularly to reflect the current market cap of the constituents.
The S&P 500 Index is a Capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.