Tech Titans: Why Diversification Still Matters [VIDEO]

Chat GPT and artificial intelligence (AI) have garnered headlines this year. The group of seven technology stocks known as the "Tech Titans" has innovated within the AI space and now includes the largest companies in the S&P 500 index.

In fact, the five largest companies in the S&P 500 are members of Tech Titan club and account for 22% of the entire index’s total market capitalization. These five companies include Apple, Microsoft, Amazon, NVIDIA, and Alphabet (the parent company of Google).

The S&P 500 is now highly concentrated, surpassing the previous record set by the five largest companies of December 1999. Back then, Microsoft, General Electric, Cisco, Walmart, and Intel collectively represented around 19% of the S&P 500.

How have those five stocks fared since 2000?

Figure 1 shows their combined weight in the S&P 500 has declined over time, while the weight of today’s five largest stocks has steadily increased:

Figure 2 shows the five stocks have produced an average total return of 216% since 2000, compared to the S&P 500’s return of 349%:

At an individual stock level, only one out of the five stocks (MSFT) managed to outperform the S&P 500 over the past two decades.

As the data illustrates, four of the five largest stocks from 1999 proved not to be the "winners" of the future.  Diversification worked!

Will today's winners also be tomorrow's winners?

Maybe, but maybe not...While history will ultimately decide what happens this time around, we believe in the importance of diversification companies, sectors and asset classes. Financial markets are constantly evolving and diversified portfolios help smooth returns over time and decrease overall investment risk.

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