S&P 100 to S&P 500 Ratio

Market Concentration

If you know stocks, you know the S&P 500. But, if you are like me, you may not be as familiar with all the different variants out there.

They can get pretty complicated but one version that’s really simple to understand is the S&P 100 index. To make it, just take the S&P 500 and then get rid of all the constituents except the largest 100 in the index. Easy!

Now, I would normally show the S&P 100 in its own separate little write up but it’s so similar to the S&P 500 that it wouldn’t really be worth the effort. However, it’s similarity to the S&P 500 allows for some interesting analysis when the two indices are compared:

Taking a ratio of the two indices creates a metric for market concentration. Essentially, the bigger the big companies are, the higher this ratio will go. This works because both indices hold the same number of stocks over time. However, the market capitalization for the underlying components can vary.

What we see with the S&P 100 versus using the another index like the Nasdaq 100 is that there isn’t a significant amount of concentration risk with this metric. With a few exceptions, it’s mostly been downhill since the tech bubble.

The most recent spike can be explained by a flight to stronger balance sheets in the wake of the coronavirus. Smaller companies that may have less cash on hand could have a harder time performing or even surviving, whereas big companies can (generally) weather the storm more reliably. Just like with the financial crisis, this could be a fleeting phenomenon. But, then again, these are very different times and it is a very different recession.