Question of the Week: The S&P 500 Pits the Big Dogs Against the Little Dogs

What's in your portfolio?

Given the number of people who read Filthy Rich Animal each week, there’s a good chance that you and I have never met. However, there’s a good chance that I could still name the stocks that have the biggest sway over your retirement portfolio.

That’s because most of you probably have the bulk of your stock market holdings in some kind of fund, like an ETF, that invests in the S&P 500.

And that’s not a bad thing! It means that you are probably diversified.

The largest company in the index is Nvidia NVDA. It has a market capitalization of around $3.8 trillion. That’s big, especially considering that the total value of every company in the S&P 500 is about $55 trillion.

The S&P 500 pits the big dogs against the little dogs. Bigger stocks like Nvidia hold greater sway over the performance of the index than smaller companies like Norwegian Cruise Line or soup maker Campbell's Co. 

So, when Nvidia gains but the other companies in the index are unchanged or fall in price, the S&P 500 is still likely to go higher.

Keep that in mind as you answer this week’s question, which requires you to do a little bit of math. But I promise that the answer won’t be too mathy.

The Question of the Week

If on Monday Nvidia stock went up by 10% and every other stock in the S&P 500 was unchanged, how much would the S&P 500 Index change by?

1. 10%
2. 0.02%
3. 0.68%
4. Dunno

What you need to know

Before I get to the answer, I should tell you why I’m asking this question.

It’s because many of you own the S&P 500 in your retirement account, but you have no idea what that even is! It’s not your fault. Your teachers may not have known, either.

So, what is this S&P 500 thing we’re always talking about?

The S&P 500 is a stock index. It holds shares in 500 of the largest, most influential companies that trade on U.S. stock exchanges. It's important as a benchmark for how the economy is doing.

Here’s a list of the top 10, ordered by market capitalization:

• Nvidia Corp.
• Microsoft Corp.
• Apple Inc.
• Amazon.com Inc.
• Alphabet Inc.
• Meta Platforms Inc.
• Broadcom Inc.
• Tesla Inc.
• Berkshire Hathaway Inc.
• JP Morgan Chase & Co.

You probably recognize every one of those companies. You probably use the products from several of them, too. And when they do well, the economy is likely to be doing well.

Nvidia is the largest of them. And with a market capitalization of $3.8 trillion, it makes up 6.8% of the $55 trillion total value of the S&P 500.

The S&P 500 is what’s called a Market Capitalization Weighted index. That means that each company’s weight in the index is based on the value of its shares in the stock market. The big dogs have more sway than the little dogs do. It's like a big dog park, really.

Nvidia has about 24.4 billion shares outstanding and it traded at $155 on Thursday, when I wrote this. Multiply the price of each share times the number of shares and you get a value, a market capitalization, around $3.8 trillion.

Now, divide Nvidia’s $3.8 trillion market cap by the $55 trillion total for the S&P 500 and you get 6.8%.

In other words, Nvidia’s total value makes up 6.8% of the total value of the S&P 500.

See?

By contrast, Coca-Cola is the 26th largest company in the S&P 500. Everybody knows what the company makes! But its market cap of $299 billion, while still huge, is much smaller than Nvidia’s. It has a weight of just 0.54% in the S&P 500. So, when it goes up by 10% in a single day, it contributes just 0.05% to the overall gain of the index.

Nvidia's performance will crush Coca-Cola's nearly every day. (Sorry, Coke investors.)

If you understand that math, then perhaps you know the answer to this week’s question.

If, on Monday, Nvidia stock went up by 10% and every other stock in the S&P 500 was unchanged, how much would the S&P 500 Index change by?

The Answer

Take Nvidia’s weight of 6.8% and multiply it by Monday’s 10% gain and you get 0.68%.

Get it? Nvidia, which is much bigger than Coca-Cola, has a bigger sway over the performance of the S&P 500.

Earlier, I listed the top 10 companies in the S&P 500. When you add up the total value of those companies, you get nearly $21 trillion. That’s 38% of the total value of the S&P 500.

Here’s another thing you should know. The top eight of those companies are basically technology companies. So when tech stocks are strong, it’s a good bet that the S&P 500 will be strong, too.

So, I can tell you that when tech is strong, these days, there’s a good chance that your portfolio is up, too.