Over the last twenty years the composition of the top ten firms by market capital value has undergone consistent turnover. Tech companies that quickly rose to relevance disappeared into obscurity with much the same pace. Value retailers became ubiquitous and then obsolete corresponding with the re-emergence of tech and explosion of online shopping. Financial institutions gained, lost and gained back consumers’ trust, and public perceptions of energy companies experienced similar highs and lows. Today, tech companies once again dominate market cap value rankings, with the top firm Microsoft now exceeding $1 trillion.
What does the graph show?
The graph displays the top ten companies by market capitalisation value in 1999, 2004, 2009, 2014 and 2019. Within each year companies are listed in descending order by value from left to right. The names of the companies are listed on the x-axis and market cap values are listed in $US billions on the y-axis. Within the chart, red indicates the company is classified as technology-based, blue as financial, green as pharmaceutical, yellow as energy, and grey as miscellaneous.
Why is the chart interesting?
From 1995 to 2000, the technology-dominated NASDAQ index increased in value over fivefold. At the peak in March 2000, Dell and Cisco placed huge sell orders on stock spawning panic-selling amongst investors. Within weeks the market shrunk by 10% and investment capital for tech startups became increasingly scarce. These drops became more entrenched following 9/11 attacks and Enron.
The Dot Com bubble is one way of explaining the change in the landscape of the top ten market capital firms after 1999. The Dot Com bubble of 1999-2000 was fueled by increasing investments in internet-based companies and rapid growth in technology equity stocks. Some hold the view that the Tax-Payers Relief Act of 1997 primed the market for bullish behavior by encouraging investment in stocks that paid little or no dividend, by investors who were ill-informed on the sector.
As a result, in 1999 six tech companies dominated in the top ten of market capital share, but by 2004 there were only two. Investors became increasingly cautious of the profitability of new tech companies. During the bubble, internet companies that lacked revenue, profit, or even a final product, rushed into IPOs and still tripled or quadrupled in value soon after.
With the market share of tech firms receding, other firms rose to the top. Energy companies General Electric (GE) and Exxon became the leaders in market cap value combining for over $600 billion in 2004. GE had experienced a strong run of growth under former CEO Jack Welch, who combatted non-profitable GE businesses swiftly by either fixing, selling, or closing.
Exxon had also grown dramatically through support of the U.S. government. Exxon Mobil Corporation PAC contributed significant amounts of money to candidates during election cycles. Relationships with Dick Cheney and former President George W. Bush proved beneficial in international business, particularly in places such as Indonesia, Equatorial Guinea, Nigeria, and Chad. Perhaps in distrusting tech companies, investors were driven toward stocks with historical success including energy companies for whom demand remains relatively stable.
Another notable trend was the emergence of financial companies into the top ten market caps of 2004. These include Citi, AIG, and Bank of America- none of which would still reside within the top ten just five years later. AIG was infamously bailed out by the US government following the 2008 financial crisis, having fallen into the lucrative trap of credit default swaps. AIG was forced to make good on coverages despite defaults and suffered upwards of $25 billion in losses. Deemed ‘too big to fail’, AIG was given more than $150 billion (US) in bailout.
With lost confidence in major American firms, investors shifted towards several Chinese companies including ICBC, China Mobile, and Chinese Construction Bank.
ICBC set the record for the largest IPO at the time when it went public in October 2006 appearing on both the Hong Kong and Shanghai Stock Exchanges. In 2008, it became only the second Chinese bank since 1991 to gain federal approval for a branch in New York City. Furthermore, it had three key investors- American Express, Dresdner, and Goldman Sachs.
China Construction Bank (CCB) was also listed in the top ten with a market cap of $182 billion in 2009. Similar to ICBC it benefitted from large initial investments by American banks. For example, in 2005 Bank of America owned $44.7 bn shares of the company, equivalent to a 19% stake. Foreign banks aimed to gain access to the growing Chinese consumer population through their investments.
Over time, however, foreign banks reduced their positions and in 2013 Bank of America became the second bank (behind Goldman Sachs) to fully leave CCB. One driving factor was the Dodd Frank Act, which required large financial companies to conduct annual stress tests. Off-loading shares helped companies to increase their capital holdings in line with the new legislation.
It is also worth noting that 2009 marked the third occasion Walmart had ranked in the top ten market cap values ($189 billion). Walmart enjoyed significant growth as a value retailer alongside its competitors K-mart and Target. The success of the Arkansas based retailer showed that consumers were willing to sacrifice store environment for cheaper prices, something that can be seen continuing in the UK context today. The success of large value-retailers has also led, however, to what has been called the ‘walmart effect.’ It is the detrimental impact felt by smaller local businesses when large retailers such as Walmart open in their area. Indeed, they are often driven out of business and local workers suffer from suppressed wages.
Moving to 2014, several energy companies again listed within the top ten market caps. Exxon and Shell were particularly strong with PetroChina briefly having the largest market cap of all companies. Their decline (none listed in 2019) was partly driven by the oil crises occurring during the decade.
Oil has always been subject to booms and busts. In 2015, oil price declined in large part due to the strengthening of the U.S dollar. In 2015, the Energy Information Administration also reported that the U.S. commercial crude oil inventories had reached nearly 500 million barrels, the highest inventory level in 80 years. The introduction and widespread adoption of fracking, alongside the vast reduction in its associated extraction costs has further increased supply and suppressed prices. The geographic distribution of shale oil extraction has rendered the companies who extract it subject to more stringent competition regulation, thereby reducing the ability of parties to fix prices.
The strong dollar and increased supply was coupled with weakening demand due to stagnating European economies and China’s economic struggles (China was the largest oil importer at the time). The result was a 70% decline in real oil prices from mid-2014 to early 2016. Altogether, these factors help explain energy companies’ drop from the top ten rankings in 2019.
2019 marks the re-emergence of tech, which occupies seven of the top ten. The digital advertising industry, including the likes of Alphabet and Facebook, has become increasingly dominant. Google re-organised itself in 2015 as a subsidiary of Alphabet, with the intention of expanding outside internet search and advertising. Nevertheless, advertising for Google properties (Maps, YouTube, Play) and Google Network Members comprise 85% of Alphabet’s total revenue. Similarly, 98.5% of Facebook’s revenue comes from advertising.
According to eMarketer, digital ad spending in the U.S surpassed traditional media ad spending in 2019 and is expected to increase moving forwards. The growth of this industry reflects consumer adoption of online platforms. However, some consumers weigh the increasingly invasive nature of online ads against personal data privacy.
Alibaba is now also one of the world’s largest online commerce companies. Alibaba’s success has been in bringing small family retailers to an ever-growing online Chinese consumer base. Alibaba is different from competitors such as Amazon because it charges no listing fee and also maintains no warehouses for inventory. However, the simplicity of Alibaba’s platform has led to increasing copy-cats who inevitably erode operating margins.
There have been tech booms and oil crashes, bull and bear markets, and periods of retail dominance. However, two companies which have been models of consistency (at least in regard to market cap) are Microsoft and Johnson & Johnson. Microsoft has appeared in the top ten market cap rankings for the last twenty years. Of the current big five tech companies, it has maintained the most diverse revenue portfolio. Similarly, Johnson & Johnson has listed in the top ten for the last ten years and it also benefits from three large revenue streams- pharmaceuticals, healthcare, and medical devices. While other companies seem to come and go, these two have stood the test of time.