Published On: September 21, 2023

Written by: Ben Atwater and Matt Malick

On the surface, U.S. equities are having a good year.  Following a brutal 18.11% loss in 2022, the S&P 500 is up over 16% year-to-date, both figures including dividends.  But scratching below the surface reveals uneven gains among individual stocks.

The S&P 500 is a market capitalization-weighted index, meaning that a stock’s weighting in the calculation of the index’s returns is based on the market cap of the stock, i.e. price per share times shares outstanding.  In other words, bigger companies have an outsized impact on the S&P 500’s returns.

Comparing the market cap-weighted S&P 500 to an equal-weighted S&P 500 index shows that the average stock has dramatically underperformed the overall index.

In fact, the eight largest companies in the S&P 500, seven of them technology stocks, have averaged nearly an 82% return year-to-date. The rest of the index, a 5% average gain1.  The market’s leadership has been quite narrow, as opposed to a broad-based rally where most stocks are participating.

These top eight stocks represent about 30% of the cap-weighted S&P 500 index.  Investors who haven’t owned them this year are undoubtedly frustrated.  Our clients generally own Apple, Alphabet and Microsoft, but certainly not in the concentrations they represent in the S&P 500.

Trends like the 2023 tech trade don’t last forever though.  Investors chase hot returns, asset classes and individual stocks become crowded and eventually the tide turns.

Take 2022 as an example, when tech stocks were battered and the rest of the market held up relatively well.  Investors who fled tech stocks in 2022 would’ve grossly underperformed this year.

The unfortunate reality is that nobody can predict these trends and when they will begin and end.  The only reasonable way to approach investing is by sticking to a disciplined process that holds up fairly well through all market environments.

1 In this case, the equal-weighted S&P 500 Index return is lower than the average return of both the top 8 and bottom 492 component stocks because the index rebalances on a quarterly basis.

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