Investors in the Nasdaq 100 will be paying particularly close attention to earnings from the top tech companies starting Wednesday afternoon.
Whether looking at this year's stock market action, or its performance over a one-year, three-year, five-year or 10-year stretch, the Nasdaq 100 has outperformed the broader Nasdaq Composite and the S&P 500.
Buying that index has increasingly turned into a bet on a six-pack of tech stocks.
Apple, Microsoft, Amazon, Alphabet, Facebook and Tesla now account for almost half the value of the index, which consists of the 100 largest publicly traded nonfinancial institutions. Even amid the coronavirus pandemic and soaring unemployment, all six have rallied this year, with gains ranging from 16% (Alphabet) to 279% (Tesla).
It's not just the Nasdaq 100 — the concentration of market cap in the biggest tech companies is skewing all the cap-weighted indexes. The S&P 500 gets 22% of its value from five of those companies, up from 17.5% just six months ago. (Tesla isn't included because it hasn't yet met the index's requirement for profitability.)
The six now make up almost 41% of the Nasdaq, which has more than 2,700 member companies.
The Nasdaq 100 claims on its website that it has "strength in diversity" and says that diversity "has been critical to the index's strong performance and success over the past two decades." It has beaten the S&P 500 10 of the past 11 years and, over the past decade, the Nasdaq 100 is up 496%, versus 205% for the S&P 500 and 388% for the Nasdaq Composite.
While there may be diversity among the components of the index, the concentration at the top is greater than at any of its major index peers. That leaves investors in the Nasdaq 100 particularly susceptible to earnings that will be coming out over the next week.
Microsoft and Tesla are set to report quarterly results Wednesday afternoon. Apple, Amazon, Alphabet and Facebook all follow next week. Heading into earnings season, the Nasdaq 100 is trading at about 30 times forward earnings, the highest since 2004, according to FactSet. Its multiple to revenue is at the highest since 2002.
Outside of the the top six stocks, the companies that have had the biggest impact on the Nasdaq 100 this year are Nvidia, PayPal, Zoom and Netflix, which are up 52% (Netflix) to 284% (Zoom). Moderna has been the next biggest contributor, on optimism that the biotech company will successfully develop a Covid-19 vaccine. The stock is up 320% for the year.
Despite their huge gains, those five companies combined make up just 6.9% of the Nasdaq 100. Amazon, Apple and Microsoft are each over 11% of the index.