#MacroFriday: Big Tech, Big Returns

 

Of course, our MacroFriday is focused on macro-economic developments, but some companies have grown so large and/or important that their impact on the economy and financial markets can no longer be overlooked. One such company is Nvidia, which has rapidly become the largest company in the world.

On Wednesday, investors followed the publication of Nvidia’s third-quarter results with great attention. In 2023, Nvidia’s weight in the S&P 500 index was just over 1%. After an equity price increase of 1,100%, its remarkable performance pushed its weight in this index to more than 7.5%. While investors have expressed concerns about high valuations and the possibility of an AI bubble, the company’s Q3 results once again exceeded market expectations.

The Big Tech companies, Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla, are often referred to as the Magnificent 7, as they dominate the index both in weight and performance. Although we may want to reconsider some of these names, the combined weight of these Magnificent 7-companies exceeds 35% of the index. The chart illustrates the extraordinary contributions these companies have made to S&P 500 returns in recent years. However, it’s important to note that the graph begins in 2023, following a disappointing 2022 during which these companies significantly dragged down index performance. Nonetheless, these Big Tech firms were also the primary drivers of earnings growth, as their earnings expansion far outpaced that of the remaining S&P 500 companies.