The following is another excerpt from our recently published research, which is now available to download.

In it, we explore the composition of the stock market, which, as it is often defined today, is being driven by companies traditionally considered to be of the growth style, whereas value is becoming increasingly synonymous with business models more prone to disruption.

You may download the publication in its entirety by clicking here. 

When you sort through the publicly traded equity universe, you find companies aggressively innovating down the path of their disruptive opportunity set, and you also find others with crosshairs on their back. These scenarios often can be used to describe many companies traditionally found in the value versus growth camps. As the broader stock market indices aggregate their results, say the S&P 500 or the Dow Jones Industrial Average (“the Dow”), the composition of both indices today looks very different than it did a decade ago. For example, observe how the constituents of the Dow have changed over time. The thirty constituent stocks that make up the Dow are chosen by a committee tasked with selecting companies that have “an excellent reputation, demonstrate sustained growth and are of interest to a large number of investors.”

Looking at the cohorts of additions and subtractions chosen by this process, you see Apple [AAPL] displacing AT&T [T] in 2018, and Citigroup [C] and General Motors [GM] exiting at the same time as Cisco Systems’ [CSCO] 2009 addition. Intel [INTC] and Microsoft [MSFT] also displaced the cohort of Chevron [CVX], Sears Roebuck [SHLD], Goodyear Tire [GT] and Union Carbide [acquired by Dow Chemical in 2001] back in 1999. In fact, today there are four NASDAQ-listed issuers that comprise the Dow, which traditionally was viewed as an exchange containing more volatile issuers. As such, even the Dow has become more tech-centric, embracing select gatekeepers of disruptive innovation as a natural outcome of its efforts to remain a relevant barometer of the market.

Another perspective that reveals more of a shift in the market composition is to overlay the list of issuers in the S&P 500 with those of the Russell 1000 Growth Index. Unlike the Dow’s more arbitrary approach of selection by committee, S&P and Russell have more quantitative methodologies for determining their respective constituency composition….       

To read the rest of our research, click here.