Understanding US company ‘cap’ sizes* Market capitalisation (‘cap’) is a measure of a company’s value, calculated by multiplying its current share price by the total number of outstanding shares.
Mega-caps: companies with a market capitalisation (value) of US$200 billion or higher.
Large-caps: US$10 billion–US$200 billion.
Mid-caps: US$2 billion–US$10 billion.
Small-caps: US$250 million–US$2 billion.
In the US, just 8 companies known as the ‘Mega Cap 8’– Alphabet, Amazon, Apple, Meta, Microsoft, Netflix, NVIDIA, and Tesla – currently represent roughly 60% of the total performance of the 1000 largest companies in America, which are tracked on the Russell 1000 Index. Against this backdrop of extraordinary concentration, it has become increasingly important to try to find diversification in equity investing.
The narrowness of the market’s performance so far in 2023 reflects the excitement around artificial intelligence (AI) that has dominated headlines and driven the technology-heavy Nasdaq Index up 38% year-to-date. By contrast, the S&P Midcap 400 and Russell Midcap indices are both up by a more modest 13%.
The Mega Cap 8 compounded revenue at an average of over 25% per year over the last decade. Should that continue, their revenues would expand from about $1.7 trillion today, to almost $17.7 trillion in ten years’ time – up elevenfold. For comparison, total US GDP currently stands at $26.8 trillion today. Growth among the Mega Cap 8 could potentially be lower in the future however, due to factors such as regulatory scrutiny (which is an increased focus for the current US administration) and competitive intensity – as companies increasingly challenge each other in the same areas of evolving technology applications.
We believe that better risk-adjusted opportunities can be found elsewhere in the US. Mid-cap companies have underperformed their larger cap counterparts for the past decade, particularly in the past 5 years. Valuations of mid-caps have become more attractive, with the relative price-earnings (P/E) ratio of the Russell Midcap Index versus the Russell 1000 Index continuing to decline since its peak in 2013. It now sits near its lowest level since 1999.
There are a number of other factors at play that are likely to benefit mid-cap companies in the future. Biden’s steely vision to establish the US as a self-sufficient economy has led to the enactment of a comprehensive set of legislation, aimed at addressing a broad set of priorities. The Inflation Reduction Act has supercharged investment through Federal government incentives into America’s industrial base. The most obvious beneficiaries of this are ‘real economy’ companies – i.e., companies that tend to be more mid-sized and domestically focussed, feeding products and services into the wider economy.
The US government’s efforts to onshore more manufacturing activity are likely to disproportionately benefit smaller and mid-sized companies that have not built out their global supply chains to the same extent as many larger companies. While the Mega Cap 8 navigate the increasing complexity of global supply chains and diverging global regulation, domestically focused mid-cap companies are well positioned to benefit from generous government financial support – with a huge market of domestic consumers, and US energy independence keeping costs competitive. There is also a remarkable degree of bipartisan political consensus behind the commitment to reindustrialise America.
Moving down the market cap spectrum does not necessarily come at the cost of quality. Mid-caps offer diversified exposure to the broader US economy – an economy that continues to prove its resilience through its deep capital markets, abundant labour supply, and energy self-sufficiency. Many of these companies are well traded, liquid, and are often under-researched. Whilst shorter-term market headwinds may continue, the next decade could look quite different to the last, where the performance of the US equity market may broaden beyond a few dominant growth companies.
Jon Tredgett
Portfolio Manager at Findlay Park Partners LLP
©2023 Findlay Park Partners LLP, authorised and regulated by the Financial Conduct Authority (“FCA”) as a limited liability partnership registered in England and Wales (Reg. No. OC303640). Registered office: 4th Floor Almack House, 28 King Street, London, SW1Y 6QW
Sources: All performance data as at 31st July 2023. Mega Cap 8 revenue data from FactSet using last 10 fiscal years.
* Source for US company cap sizes: Finra. Definitions can vary and those listed do not necessarily align with the definitions of Findlay Park Partners LLP.
Illustration by Adam Mallett
