What Is a Mega Cap?
Mega cap is a designation for the largest companies in the investment universe as measured by market capitalization. While the exact thresholds change with market conditions, mega cap generally refers to companies with a market capitalization above $200 billion. Many of the companies boast strong brand recognition and operate in major markets around the world, such as Apple (AAPL), Amazon (AMZN), and Facebook (FB).
- Mega cap companies are those with market values well above the rest of the market, with valuations over $200 billion.
- Due to the market value weighting of indices, mega cap stocks have been in a unique position to sometimes lift or drop an entire index based on their stock performance.
- Mega cap stocks in the past have predominantly been in the energy or transportation sectors such as those in oil or railroads. Today, many of the largest companies in the world are tech companies such as Tencent and Amazon.
Understanding Mega Caps
Mega-cap stocks often wield significant influence in different industries due to the size and volume of goods and services sold during a given time period. Apple, for instance, holds a market cap north of $1.3 trillion as of May 2020 owing to continued strength in iPhone sales, whereas Amazon reached new highs on the success of retail operations and web services. Today, there exist about 10 companies traded in the United States that hold capitalizations over $300 billion, most of them now operating in the technology sector. In the past, blue-chip companies such as ExxonMobil (XOM) and General Electric (GE) held most of these seats as investors trusted them to deliver consistent dividend payments and steady returns.
Meanwhile, mega-cap stocks are no longer confined to the US, Europe, and Japan. Steady growth in emerging markets in the past decade has resulted in a greater representation of stocks from other nations. China, in particular, is now home to two of the largest global companies in Tencent and Alibaba (BABA).
On a sectoral basis, the commodity boom of the early 2000s led to many energy and resource companies achieving mega-cap status. On the other hand, the dramatic decline of US and European banks following the 2008 credit crisis dragged some of the biggest banks below mega-cap status. And today, the surge in innovative and disruptive technology lifted the entire sector and many of its constituents to new heights. Many of the largest companies in the US now have ties to cutting-edge technology but also boast significant returns.
Limitations of Mega Cap Stocks
The stock market, as measured by the S&P 500, is being led higher by a handful of mega cap tech stocks. This concentrated leadership has investors worried about the potential for another tech bubble. If these select stocks were to experience a sustained downturn, it could have a significant impact on the broader market. This trend reflects investor’s tendency to pile into one corner of the market, rather than following basic investing strategies of rebalancing and sector rotation.