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The Ebb and Flow of Corporate America

June 22, 2023 | Posted in: Wealth Strategies

Dynamism may be the defining characteristic of capitalism in that companies are born, they grow and expand, some prosper for years, and many disappear. Perhaps the best way to demonstrate this phenomenon is by examining the changing composition of stock market indices. The Standard and Poor’s 500 is a widely used stock index that is capitalization weighted which means that each constituent’s weight in the index is determined by its relative market value. And, market value is a function of both a company’s financial performance and investor sentiment as measured by the P/E ratio. The following tables depict the significant changes in weights as industries come into and out of favor over time:

S&P 500 Industry Weights

1980 28%
2023 4.5%

Information Technology
1992 6%
1999 30%
2002 16%
2023 26.1%

2002 20%
2009 9.8%
2023 12.9%

Communication Services
2002 5%
2012 33%
2023 8.2%

Each year, 20-25 stocks in the S&P are dropped and replaced and a total of 686 companies have been in the index since its creation in 1957. Two other pieces of information dramatically illustrate the vicissitudes of Corporate America. JP Morgan found that 40% of the stocks in the Russell 3000 (a broader index than the S&P 500) have suffered a permanent decline of more than 70% from their peak value. And, 52% of the Fortune 500 stocks have gone bankrupt, been acquired, or otherwise ceased to exist since 2000.

The moral of the story is that the only constant in the investment world is change.