S&P 500: Take the Field, or the Top Five?

An interesting question was raised in Patrick O’Shaughnessy’s interview with Carl Kawaja, a portfolio manager at Capital Group.

A colleague did some math that particularly resonated with Carl. It was simple math. He looked at the percent of earnings the top five companies in the S&P 500 account for. It’s roughly true that Amazon, Apple, Facebook, Google, and Microsoft account for about 22 percent of earnings. And the five represent a similar percent in market cap as well.

If you assume they’re all growing roughly 15 to 20 percent a year, in about a decade they’re going to account for 75 percent of the S&P 500 earnings. Most would agree the rest of the S&P 500 isn’t going to compound at that rate. The scenario seems unlikely to Carl.

And the interesting question posed by Carl is: If you were a betting man, would you take the other 495 companies? Would you take the field, or the top five companies?