What Amazon’s rise to No. 1 says about the stock market

The biggest companies are still the most dominant — but they can still be toppled

On Jan. 7, Amazon.com Inc. became the world’s largest company by market capitalization. Its rise might make you think today’s biggest technology companies are turning into unstoppable juggernauts of growth, or that turnover at the top is only accelerating.

First, consider the history of all the companies that have ranked No. 1 by market size. It’s full of surprises.

From the beginning of 1926 through the end of last year, only 10 companies have ever ranked No. 1 among all U.S. stocks by market capitalization. Amazon has just become the 11th, succeeding Microsoft Corp., Apple Inc., Exxon Mobil Corp., General Electric Co., Walmart Inc., Altria Group Inc., International Business Machines Corp., DowDuPont Inc., General Motors Co. and AT&T Inc. Some, including AT&T and IBM, spent years at the top. Others, including Altria, DuPont and Walmart, were No. 1 for less than a month; Walmart was the biggest U.S. stock for only three days in late 2002, according to the Center for Research in Security Prices, or CRSP, at the University of Chi- cago’s Booth School of Business. However, companies have been holding on to the No. 1 position by market value for about as long as they used to.

Hendrik Bessembinder and Goeun Choi, finance researchers at Arizona State University, calculate that the largest company in the U.S. clung to that spot for an average of 20 months from the late 1920s through the late 1950s—although it was nearly always either AT&T or GM.

From the 1960s through the end of the1990s, the top company held the No. 1 position for an average of 12 months. From 2000 through mid-2018, the average tenure at the top was 15 months.

Over the past month, Apple, Microsoft and Amazon, all with market values of $700 billion or more, have each been No. 1 for several days at a time.

Still, Warren Buffett’s oldschool conglomerate, Berkshire Hathaway Inc., hovers not far behind at nearly $500 billion in market value.

Talk to any professional stockpicker and you will get an earful of whining about how today’s market is “narrow” or “concentrated” or “top-heavy,” with the largest stocks accounting for an unusually large share of total value. That’s historical hogwash. Amazon, at less than 3% of the total value of all U.S. stocks, is a minnow alongside the leviathans of the past.

AT&T was 13% of total U.S. stock-market value back in 1932; General Motors, 8% in 1928; IBM, 7% in 1970.

The single largest stock has made up about 3% of total U.S. market capitalization for the past 20 years, according to Savina Rizova, co-head of research at Dimensional Fund Advisors, an investment firm in Austin, Texas, that manages $517 billion. That’s down from the earlier average, since the late1920s, of nearly 6%.

Companies tend to become the largest by market value after their stocks have done well. Over the 12 months ended Jan. 7, Amazon’s shares outperformed the S&P 500, including reinvested dividends, by about 38 percentage points.

And Amazon’s shares jumped after the company became the biggest, as if some investors had taken that as a sign of approval from the market gods.

Likewise, the 10 companies that preceded Amazon tended to be on a hot streak before they became the biggest U.S. stock. Counting all the times they reached the No. 1 position, they outperformed the market by an average of 48 percentage points cumulatively over the preceding five years, based on the available data, according to CRSP.

The catch: Over the five years after they hit No. 1, they underperformed the overall U.S. stock market by an average of 6 percentage points.

What if you just bought the largest stock in the month after it became No. 1 and held it so long as it remained there? You would have earned an average of 7.3% annually from January 1926 through November 2018, calculates Rui Dai of Wharton Research Data Services. Over the same period, the full U.S. stock market grew at an average of 9.7% annually.

All these figures include reinvested dividends.

While such numbers confirm the conventional wisdom about how market leaders are likely to perform, they come with a caveat. So few companies have ever occupied the No.1position by market capitalization, often for such short periods, that you can’t draw statistically valid conclusions from such a small sample. Amazon declined to comment. In a recent interview at the Economic Club of Washington, D.C., the company’s founder and chief executive, Jeff Bezos, invoked the great investor Benjamin Graham’s saying that in the short run, the stock market is a voting machine, but in the long run it’s a weighing machine.

“What you need to do,” added Mr. Bezos, “is to operate your company in such a way knowing that it will be weighed one day and just let it be weighed. Never spend any time thinking about the daily stock price. I don’t.” (This week, Mr. Bezos and his wife, MacKenzie, announced they are divorcing.)

All in all, Amazon’s ascendancy is a reminder not of how new this era is but how old the dominance by big companies is. In some ways, these are the good old days: The top stocks account for less of the total market, and the giants don’t appear to be much easier—or harder— to topple than they used to be.

Amazon’s shares jumped after the company became the biggest, as if some investors had taken that as a sign of approval from the market gods