We have another study from the crack Calcbench research team, this time looking at the giant tech firms and whether their sky-high market valuations really do overshadow all other firms in the S&P 500.

As you may have seen in the Financial Times and other business press, one idea making the rounds these days is that the five tech giants — Microsoft, Apple, Google, Amazon, and Facebook — have seen such gigantic run-ups in their market valuations that they are pushing up the overall S&P 500 index to artificial highs, and therefore masking weaker performance among the other 495 firms.

That concern isn’t without merit. Apple ($AAPL), for example, has seen its market cap increase by $1 trillion in the last 11 months. Amazon’s ($AMZN) market cap has gone from $887 billion one year ago to $1.596 trillion today. Those are huge spikes in valuation.

So our research note tried to understand: What’s driving this momentum? Are there any metrics that might suggest the over-performance of these five firms — which we’ve dubbed “the MAGAF Group” — could actually be justified?

Well, maybe. Hear us out.

First, the market cap of the MAGAF Group does account for an outsized portion of the S&P 500’s total market cap: roughly 22.1 percent at the end of July. But in first-quarter 2020 they also accounted for 16.1 percent of all net income, 13 percent of operating cash flow, and 13.1 percent of operating income. See Figure 1, below.

Corporate finance theory says that share price is a function of expected net income. So is that outsized financial performance worth the 22.1 percent outsized market cap? You tell us. The numbers aren’t that far apart.

But wait! Corporate finance theory specifically says share price is a function of expected future earnings, and the table above reflects prior earnings.

Our research note tried to address that too, by examining prior growth in net income for the last several years — using those numbers to approximate momentum in earnings growth, if you will.

So if you could “invest” in $1 of net income in the MAGAF Group (we know you can’t do that in the real world, it’s a thought experiment), that $1 would be worth $1.57 today. But $1 of net income in the S&P 500 overall, or the S&P 495 without that MAGAF firms would actually be worth less than $1 now.

That could explain the runaway growth in market cap for the MAGAF firms: because their earnings have been running away from the rest of the S&P 500 firms, too.

Do other factors contribute to the market cap growth? Most likely. For example, the poorer net income growth among the S&P 495 really took a turn for the worse only this year, when the pandemic struck.

So are the MAGAF firms doing so well because they’re relatively immune (no pun intended) to the pandemic’s pressures? Or are they doing so well because so many other firms were hammered by the pandemic, so investors just dumped their money into the only stocks still doing well?

Again: you tell us. We’d be eager to hear your theories; email us at info@calcbench.com.

Our research note is simply one interpretation of the data. We have plenty more data to test your own hypothesis.