What would be the rationale for changing our benchmark from the S&P to the Nasdaq? If stock prices reflect earnings growth now or in the future, there is no question that the Nasdaq, with the dominance of technology, digital platform businesses, and biotechnology, grows faster. However, because of the inclusion of so many pre-profit companies, the gap is less than expected, with the 10-year cumulative earnings per share expansion at 91.4% for the NDX and 52.7% for the S&P.
Actually, a few things. For one, the Nasdaq is more concentrated than we prefer – Apple, Microsoft, Amazon, Facebook and Alphabet – account for just under 51% of the entire index. In the S&P 500, where these names hold the same rank positions, their weight is currently less than half that amount . To outperform the Nasdaq, when these stocks are charging forward, many managers would be tempted to allocate at least half the portfolio to them.
The S&P 500 index criteria are more demanding, ensuring a level of valuation support not inherent in its counterpart. It includes the 500 largest companies by market cap, assuming they meet other conditions. While the Nasdaq Tech Sector, plus AMZN, FB, GOOGL and NFLX accounts for 75% of the index, that same grouping applied to the S&P 500 stands at 39% The remaining 61% of the S&P represent the biggest companies in all other sectors, which can be overlooked if benchmarked to the Nasdaq.
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