Keeping it Simple With the Largest of the Large Caps

There are only five stocks you need to follow: Apple Inc. (AAPL); Exxon Mobil Corporation (XOM); Google Inc. (GOOG); Microsoft Corporation (MSFT); Berkshire Hathaway Inc. (BRK/B).

These are the five largest companies in the U.S., and their collective market capitalization nearly equals the entire capitalization of their small cap brethren constituting the Russell 2000 Index.


Bespoke Investment Group founder Paul Hickey shared the perspective with us this morning in his note to institutional clients. He writes: "If all 2,000 small-cap stocks in the Russell 3000 (which includes large, medium and small caps) went to zero, it wouldn’t even equate to a 10% correction for the overall index."

In other words, the U.S. stock market is highly concentrated. We talk about the so-called "one percent" of income earners and its impact on income inequality. The same may hold for the stock market. It is very narrow. The five largest stocks are fifty-one times bigger than the average stock in the Russell 3000 Index.


Paul's acute observation makes us realize we really only need to focus on a handful of stocks -- not 3,000! Looking at the top five, and considering their outsized impact, we begin understand why the overall market continues to make new highs: These five stocks are reasonably priced and growing. Specifically,

They're trading at an average valuation of 15.7 times 2014 earnings (in the middle of the historic 14 to 17 times range cited by Citigroup Inc. strategist Tobias Levkovich).

They're growing earnings by an average of 9.6 percent, triple the annual growth rate of U.S. gross domestic product (GDP).


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