Managing the Mega-Caps
The rise and rise of the US mega-caps has been the investment story of the decade. While larger companies have dominated most global markets, this phenomenon has been particularly evident in the US. The technology giants, including Apple, Microsoft and Alphabet, have seemed unassailable, growing earnings in all economic conditions.
This has been reflected in astonishing share price growth.1 Apple first hit a $3 trillion market valuation in 2022, and then again in 20232. Nvidia and Microsoft are only just behind, having both passed the $3 trillion mark in 20243. Alphabet and Amazon are marginally smaller, at around $2 trillion, but it is worth noting that a company only needs a market cap of $200 billion to be designated as a mega-cap4.
While no one would dispute the growth potential for these companies—they remain the most obvious way to get exposure to the fast-growing AI trend, for example—they have changed the shape of the US equity market, which is now more concentrated in these huge stocks, and in the technology sector, than ever before. This brings risks that investors need to navigate.
By allocating investments strategically to both the MSCI USA Mega Cap Select Index and the MSCI USA Ex Mega Cap Select Index, investors can manage some of these concentration risks, gaining the benefits of exposure to market leaders, while remaining diversified5.
Mega-cap performance
The performance of the mega-caps is undoubtedly impressive: Over the past five years, the MSCI USA Mega Cap Select Index has delivered an annualized performance of 18%, far outpacing the broader MSCI USA Index, at 10%.6 This success has seen the mega-caps build up an outsized influence on market-cap-weighted indexes.
While their dominance has seemed unassailable, there are reasons for concern. Valuations are high: The MSCI USA Mega Cap Select Index, for example, trades at an average price-to-earnings (P/E) ratio of 32x, compared to 23.6x for the broader market, as measured by the MSCI USA Index.6 This may make these stocks more vulnerable to market corrections and volatility.
The case for mega-cap exposure
Despite their high price, mega-caps still merit a place in a well-balanced portfolio. These companies are often highly innovative and hold dominant positions in fast-growing sectors such as technology, healthcare and e-commerce. They generally have strong balance sheets, diversified businesses and, as such, real resilience. They enable investors to access pockets of growth in the global economy, such as digitalization, artificial intelligence and renewable energy.
Balancing mega-caps with broader exposure
Mega-cap allocations need to be balanced effectively with their concentration and valuation risks. With this in mind, allocating to an index that specifically excludes the mega-caps, such as the MSCI USA Ex Mega Cap Index, can provide diversification2 benefits by incorporating exposure to mid-cap and smaller large-cap companies. This exposure helps mitigate sector-specific risks and could reduce volatility. It may also help investors tap into the differentiated growth opportunities found in smaller, more agile companies. These companies often trade at more attractive valuations,3 providing a margin of safety for investors.
While mega-cap stocks may continue to lead in innovation and market influence, smaller-cap companies can offer distinct opportunities for diversification and growth.2 Ultimately, the choice depends on an individual investor’s goals, risk tolerance and market outlook—but blending the two strategically can be an effective way to create a balanced portfolio.
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1 Past market trends are not a reliable indicator of future ones.
2 https://www.statista.com/chart/14953/apple-market-capitalization/
3 https://www.investopedia.com/biggest-companies-in-the-world-by-market-cap-5212784
4 https://www.investopedia.com/terms/m/megacap.asp
5 Diversification does not guarantee a profit or protect against a loss.
6 Source: Bloomberg, MSCI, Amundi, data as of 10/31/2024. Past performance is not indicative of future returns.
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