A common characteristic of many retail investors’ portfolios is a bias towards the largest stocks in the market. This is unsurprising given the last few years the behemoths – Apple, Microsoft, Nvidia, Tesla, Meta, Amazon, and Google – (a) have been constantly discussed online and in television and (b) have delivered outsized returns. So much so they have been christened their own sobriquet. The Magnificent Seven. This creates both an opportunity and a problem for many investors. The opportunity is all the money the buyers of the Magnificent Seven have made. The problem is determining when to sell these position(s) that minted so much paper wealth. Each of these companies is at the top of the global market in their respective industries and has developed an aura of invincibility. Competitive positioning, favorable narratives (AI, hyperscaler dominance, etc.), and recent outsized returns make it tough to press the sell button.
We find a look at the past instructive. Here are the ten largest stocks (in order) at the turn of the century:
1) Microsoft
2) General Electric (GE)
3) Cisco
4) ExxonMobil
5) Wal-Mart
6) Pfizer
7) Intel
8) Merck
9) Citigroup
10) IBM
Twenty-five years later, each of these companies can be applauded for their staying power. All survived another quarter century of the vicissitudes of global competition. Each remains a household name. All but two (GE & IBM) have increased their annual revenues, with the group averaging revenue growth of +169%. All but three (GE, IBM & Citigroup) have increased their net income with an average of +171%.[i]
So how have investors of these turn-of-the-century behemoths fared since 2000?
Not great. Well, unless you put all your eggs in the Microsoft basket. Microsoft is the exception to the rule. It is the only company that remains in the list of the ten largest by market capitalization twenty-five years later (it closed 2024 at the number two spot behind Apple). Microsoft stock returned +10.34%/yr. through the first quarter of this century, compared to the S&P 500’s +7.70% annually.[ii] Though it was not without its challenges. Microsoft investors endured a drawdown reaching -69% that lasted over 15 years. Remarkably, Microsoft stock lagged the S&P 500 from 2000 – 2017.[iii] All the outperformance since the turn of the century has been compressed into the last seven years. How many investors with portfolios levered to Microsoft in 2000 held on through 2018 to capture any of that outperformance? Do you suppose there are any? (Gates, Ballmer, et al. notwithstanding)
What about those who loaded up on other members of the ten largest companies at the turn of the century? How did they fare? The other nine all underperformed the S&P 500. Two – a full 20% of the top ten – (Intel & Citigroup) have negative total returns since 2000. I’ll note again these companies all continue to be major players on the global stage. Each still report annual profits in the billions. Even excluding Microsoft, the other nine averaged a doubling of net profits over the last twenty-five years.[iv] Here’s the total return (including reinvested dividends) chart for the first quarter of the 21st century:
Even worse than all but Microsoft underperforming the S&P 500, half of the turn-of-the-century-behemoths underperformed the bond portfolio benchmark – that is the Bloomberg US Aggregate. Note the dark green line in the chart above with a full one-half of the dataset’s returns beneath it (Pfizer, GE, Cisco, Intel, & Citigroup).
The impossibility of time travel makes the following experiment impossible, but I am pretty certain anyone at the turn of the century predicting five of the ten largest stocks in the market returning less than a bland portfolio of bonds over the impending twenty-five years would have been laughed out of the room. I can imagine a temporal explorer making an impassioned plea to a room full of investors flush with portfolios gains of the great 90s bull market. He probably would have said something like, “don’t shoot the messenger.” They probably would have shot him.
This highlights one of the greatest challenges of picking stocks. Stock prices aren’t a product of what a company did last year or last quarter or what they reported on their earnings call last night; they are a product of the expectations of financial performance in the future. Morgan Housel says stock prices are a number today multiplied by a story about tomorrow. It’s the story about tomorrow that counts. If the company outperforms expectations, it will earn a premium return (see Microsoft). If it fails to meet those expectations, the market will teach it a brutal lesson (see everyone else). Cisco’s operating revenue increased by 184% during the first quarter of the century and its net income increased by 287%.[v] That’s a near tripling of revenue and a substantial increase in operating leverage and its investors received a total return about equivalent to a portfolio of short-term treasury bonds. In real (inflation-adjusted terms), Cisco’s total return from 2000 – 2024 was… negative.
Some may protest this analysis is tainted by a start date near the peak before the tech bubble popped. But the worst performing company during this time period was Citigroup (not a tech stock) and the best was Microsoft (tech stock). Run this analysis for the top ten stocks in the S&P at the beginning of any decade (or any year, for that matter). You will find similar results – massive underperformance relative to the broad stock market a few decades later.
Here are the ten largest companies in the S&P 500 at the close of 2024 – exactly one quarter of the way through the 21st century:[vi]
1) Apple
2) Microsoft
3) Nvidia
4) Amazon
5) Alphabet (Google)
6) Meta
7) Tesla
8) Broadcom
9) Berkshire Hathaway
10) JP Morgan
That list looks a bit like…
Most retail portfolios we see.
We often have investors request our thoughts on their portfolio. They’ve made some money buying stocks over the last few years and now their portfolio has reached a large enough size where they feel they should seek professional counsel. An understandable and wise sentiment (though our opinion may be a bit biased). Typically, the portfolios we see have considerable exposure to some combination of the ten largest names in the index. I can’t remember the last time I saw a portfolio that didn’t have a substantial allocation to Nvidia. The Magnificent Seven are called magnificent for a reason – their performance the last few years has been stellar. So anyone with a portfolio levered to a few of these names has likely significantly outperformed the S&P 500 since the pandemic (and no one remembers anything before 2020 – in the stock market or otherwise).
But there is a difference between an investment portfolio and a bet. Many investment accounts we review are the latter masquerading as the former. These investors’ future capital is a function of the largest stocks in the index ability to continue outperforming expectations. And those expectations are already stratospheric. The owners of these accounts have watched their returns compound the last few years and conclude investing is easy. We examine such portfolios through a historical framework that includes the returns of the ten biggest companies since 2000 and, well…
Portfolios levered to the present-day behemoths scare us a bit. Will the second quarter of the 21st century look the same as the first in the stock market?
Probably not.
Sean Cawley, CFP®
Neither asset allocation nor diversification guarantee against investment loss. All investments and investment strategies involve risk, including loss of principal.
Content here is for illustrative and educational purposes only. It is not legal, tax, or individualized financial advice; nor is it a recommendation to buy, sell, or hold any specific security, or engage in any specific trading strategy. Results will vary. Past performance is no indication of future results or success. Market conditions change continuously.
This commentary reflects the personal opinions, viewpoints, and analyses of Resolute Wealth Management. It does not necessarily represent those of RFG Advisory, clients, or employees. This commentary should be regarded as a description of advisory services provided by Resolute Wealth Management or RFG Advisory, or performance returns of any client. The views reflected in the commentary are subject to change at any time without notice.
[i] YCharts, Financial Data, 01/01/2000 – 12/31/2024.
[ii] YCharts, Fundamental Charts, SPX/MSFT, Total Return Level, 01/01/2000 – 12/31/2024. The S&P 500 is an index, and you cannot invest directly in an index. Fees and expenses will apply to any investment account; thus, your performance will deviate from the index.
[iii] YCharts, Fundamental Charts, SPX/MSFT, Total Return Level, 01/01/2000 – 12/31/2017.
[iv] YCharts, Financial Data, 01/01/2000 – 12/31/2024.
[v] YCharts, Financial Data, CSCO, 01/01/2000 – 12/31/2024.
[vi] YCharts, SPX Constituents, 12/31/2024.