The impact of COVID-19:
The stock market trend shows the impact of accelerated trends, the wider gap between winners and others, and an increase in value for mega players.
it was the stock market peak before the outbreak of the COVID-19 pandemic, causing stock prices to fall slightly. The following year, the world changed and our lives, our economies, and our economic destiny changed, an ever-changing journey reflected in the ups and downs of stock prices. Fundamental trends accelerated, causing some companies to accelerate, while winds turned into hurricanes against others.
Bringing together investors’ beliefs about the future, capital markets are a powerful indicator of the future. And this vision highlights the new realities we face.
For equity investors, last year’s drama unfolded in four separate acts, reflecting clear changes in expectations about the duration of the pandemic and its impact on consumers and businesses (Figure 1). To illustrate, we bring together 5,000 of the world’s largest companies in their respective sectors and analyze the average shareholder return in those sectors over the year. We have included a special group of companies that we call ‘Mega 25’ (more on this) in its ‘sector’ because their excellent market performance would disrupt the industry’s results.
The ‘Mega 25’ appears first
Last year, 25 companies benefited from the market cap they placed in their class. Together, they added $5.8 billion in value, an average increase of $231 billion (Figure 2). As the total market has grown by $14 billion in the past 12 months, these 25 companies account for 40% of total profits.
Note that 22 of the Mega 25s fall into four industry categories: North American technology, Chinese and Asian technology, electric vehicles, and semiconductors. The remaining three companies benefited from strong consumer demand from China. In more detail, we also see specific trends: three companies on the list – Square, Shopify, and PayPal – are revolutionizing the world of payments, which was once dominated by banks as commerce has been completely digitized.
Most of these companies had mega-caps before the crisis, but 11 started with market values below $100 billion. Many of them were in the middle of the army. Think of Zoom, a company whose name became a verb for many of us, adding $93 billion to its market value last year.
Shortly after Mega 25, 28 other companies made more than $50 billion in market cap. Many of them are in the same four sectors as the top 22, along with companies that benefit directly from pandemic demand, such as companies involved in COVID-19 management and testing, digital entertainment, and e-commerce. In total, these 28 runners-up increased their value by $1.8 billion, representing 12% of the total profit for the 5,000 companies in our sample. The combined total of 53 companies represents more than half of the market’s profits.
Acceleration of trends
A look at the trends driving the current economy shows an accelerating pattern: few new trends emerged last year, and even fewer went in the opposite direction, but many that were present before the pandemic has increased dramatically. Online shopping, distance education, telemedicine, and even geopolitical tensions are nothing new, but the COVID-19 crisis has strengthened these forces, like an earthquake releasing pent-up energy.
A look at the trends driving the current economy shows an important accelerating pattern: many pre-pandemic participants have increased dramatically.
This acceleration is reflected in the market value generated by the different sectors. The big winners of the pandemic took all the waves ahead of the pack. (Figure 3) compares the trend of the sector in the last five years with the trend of the previous year. Let’s look at the Mega 25 group in the right quadrant: these companies clearly outperformed the market before the economic shock of the pandemic. Among the sectors, advanced electronics, advanced technology, and medical technology took the lead when the COVID-19 crisis surprised them.
On the other hand, the weak performance of banks in the market is aggravated by the pandemic, as was the case in the telecommunications and energy sectors. The travel industry and related airlines are the only exceptions affected by the interruption of international travel, a new (and perhaps temporary) consequence of this crisis.
Strengthen the companies’ performance gap
The same forces that widen the gap between industries also widen the differences between industries, especially if the winners are the winners. In all sectors, including those with significant problems, some companies increased their market value during the crisis.