October 27, 2022
Over the past couple of months, the stock market and crypto markets have been experiencing a downtrend. This downtrend has affected most stocks, from large to small-cap stocks. Of the 5000+ stocks listed on the U.S. stock exchange, only thirty-six stocks have reached their all-time highs today. All other stocks are below their all-time highs.
Many people wonder how sensitive the stock market is. The U.S. stock market has more than 5000 stocks listed, but how many stocks are needed to move in order to make an impact on the stock market? Furthermore: could a single stock crash the market?
To answer this question, we will look at the valuation of the largest stock market indices compared to the valuation of the largest stocks by market cap. Then, we will observe previous downtrends of large stocks and see if they correlate with a general downtrend in the stock market.
Current stock valuation vs index valuation
The market cap for the S&P 500 is valued at around $32 trillion. The world’s largest company by market cap, Apple ($AAPL), is valued at around 2.4 trillion. This means that Apple stock represents roughly 7.1% of the S&P500’s entire market cap. Considering this, it is clear that if this single stock lost all of its market cap overnight, then the S&P 500 would lose 7.1% of its value.
That is quite a large hit, considering that any downtrend of more than 2% in the stock market is considered a red day. However, a 7% correction in the stock market may not equal an entire market crash, either.
An important element to notice is how many companies are interconnected on a global scale. $AAPL is the largest company by market cap and employs many other companies across the board to have its products built and delivered. If Apple suddenly disappears, we imagine demand for semiconductors and processors may decline.
This might decrease the value of the entire tech market or the Nasdaq. Also, if AAPL suddenly vanishes, traders and investors might generally have less trust in the tech industry. We can think of this as a “sympathy play”, of sorts: if AAPL falls, then people may estimate that other tech companies may fall with it, creating a spiraling effect that causes the entire market to sell off.
Therefore, in terms of pure valuation, a single stock crash may not be enough to crash the entire market.
However, suppose a powerful stock starts showing signs of weakness. In that case, it may risk having investors lose trust in the entire industry and markets in general, causing a massive selloff in the entire market. The sentiment of observing a large stock fail could be enough for investors to worry and cause a selloff in the entire market.
Concerning cryptocurrency, the reality is a little bit different. Bitcoin is the largest coin by market cap. The issue with crypto valuations is that every single other cryptocurrency can be traded for Bitcoin. Whereas stocks can only be purchased with USD, cryptocurrencies can generally be purchased with USD, BTC or ETH. Therefore, if the value of BTC goes down and every other cryptocurrency’s value depends on the price of Bitcoin, then all cryptocurrencies might likely decrease in value. Therefore, if BTC sells off, then the entire crypto market could sell off as well. It also brings less confidence into the crypto space, especially considering that BTC represents roughly 40% of the entire crypto market.
Could a single stock crash the market? Let’s look at history
Let’s use $AAPL as an example, as it is the first U.S. company in history to reach a market cap of over $2 trillion. Apple achieved this feat in August 2020. Now, let’s compare the reddest days for $AAPL since 2020 with the $SPY:
From May 4th, 2022, to May 12th, 2022, AAPL went from a price of $166 per share to $142 per share and lost roughly 14% of its value. During the same time, the SPY went from $429 to $392, losing roughly 8% of its value. The Nasdaq composite went from 12,964 to 11,370, a drop of roughly 12%.
As we can observe, when the largest stock sells off, there’s a tendency for the rest of the market to fall too. However, the news itself is more determinant of how the markets will perform. For example, if Apple stock sells off because of earnings miss, this might not mean that the entire tech sector will start selling off. However, people may be wary of investing their money into the tech sector, thinking that if $AAPL misses earnings, who knows which tech stock will miss earnings next?
A stock market crash is a sudden drop in stock prices. If a single stock was isolated from the rest of the markets and represented a large enough share of the stock market, its sudden drop might still not crash the market. We’ve seen many stock market crashes in the past, so measures like trading curbs have been implemented to stabilize the market.
If today’s largest stock by market cap were to suddenly drop (as we saw earlier this year) it might not cause a market crash. However, the sentiment investors would have by seeing the largest stock crash would likely not be bullish for equity markets, possibly triggering a bearish market sentiment. Therefore, many analysts believe that it is wise to focus on the bigger picture instead of being hung up on one single stock.