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The market is working for the MAN

By June 28, 2023 No Comments

These days, the MAN is in charge. Microsoft, Apple, and Nvidia are the three most important stocks in the market today. Together, their first letters give us our newest market acronym: MAN. The MAN is sure to have an outsized impact on the stock market for the foreseeable future. So if you want to know where the market is heading, just follow the MAN.

MA’s impact on the MAN

The S&P 500 is a market cap weighted index of the largest 500 companies in the US. This means bigger companies in the S&P 500 impact the index’s performance more than smaller companies.

Consider this: Apple, (the A in our MAN), carries a 7.57% weight in the S&P 500, the largest in the index. That is equal to the total weighted impact of the smallest 200 companies in the index. Apple, as a single company, has the same impact on the S&P 500 as 40% of the index’s components.

Now, if we add the M in our MAN, Microsoft, to the mix, the impact becomes even more pronounced. Together, Microsoft and Apple make up 14.34% of the S&P 500. That amount is equal to the 288 smallest companies in the S&P 500. Calling them “small” is actually misleading. The bottom 288 companies in the S&P 500 include corporations like DuPont, Delta Airlines, Prudential, Allstate, and other well known entities.

For every 10% that Microsoft and Apple rise or fall, they impact the performance of the S&P 500 by 1.34%. Apple, up 49% this year, and Microsoft, up 39% this year, have contributed a net 6.30% gain to the S&P 500 this year. With the index up 14% on the year, these two most valuable companies account for 45% of the S&P 500’s return. That’s an astounding number.

What about Nvidia? The N in MAN

Nvidia, with a 2.78% weighting in the S&P 500, may seem out of place compared to Apple and Microsoft. However, that 2.78% makes Nvidia the fourth biggest company in the index. More importantly, Nvidia’s 2.78% weight in the index is more than double what it was entering the year.

At the end of last year, Nvidia held a 1.25% weighted impact on the S&P 500’s performance. No single company has seen their influence on the index grow more than Nvidia this year. Today, Nvidia has twice as big of an impact on the market than it did just six months ago.

Essentially, we have a mechanical feature of the stock market at work: as Nvidia’s stock price increases and its market cap grows, so too does her impact on the overall market. We can measure this impact by looking at what the market cap weight used to be, (1.25%), compared to what it is today: 2.78%.

However, there’s also an immeasurable role at play. Nvidia has become the poster child for the buzzy AI theme that is permeating through the market. In simpler terms: Nvidia stock going up is good for sentiment around AI… Nvidia stock going down is bad for those same sentiments.

Because the promise of AI related technologies lies mainly in the future, at least as it relates to corporate profits, sentiment and momentum is what the market mainly has to go off of.

Recently, positive sentiment around AI is driving momentum behind Nvidia’s share price. This has become something technology investors are watching closely each day: is Nvidia going up? Then so are tech stocks. This represents a change in the market from last year, when tech investors were mainly focused on interest rates and the Federal Reserve.

The good and bad of it

As with all men, the MAN has some good qualities and some bad ones. The good news is the MAN is three companies that are cash cows. In the case of Microsoft and Apple, they generated net income of $69 and $94 billion, respectively, in the 12 months ending March 31, 2023. Their P/E ratios of 35.50 and 31.30, while above their own historical averages, are well below levels associated with prior technology bubbles.

At the height of the tech bubble in 1999, for example, Microsoft had a P/E ratio of 65. Cisco, then the second most valuable technology company, had a p/e ratio of more than 150! But that’s where the argument against overvaluation must end. Nvidia currently has an astronomically high P/E ratio of 211.

That is the clearest sign yet that Nvidia is being valued based on jubilant sentiment and share price momentum as opposed to value based fundamentals. Therefore, if sentiment around AI sours, Nvidia will be especially vulnerable to a price decline. Given Nvidia’s growing impact on the market, that’s something to be mindful of.

In summary, Microsoft, Apple, and Nvidia, or the MAN, is the main reason the S&P 500 has had a strong first half of the year. Instead of the market worrying about interest rates, commercial real estate, regional bank failures, or the recession that’s still not here, it’s focused on the MAN. As the great Roy Orbison might say, the market is working for the MAN!


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