The S&P 500 is a market capitalization weighted index, meaning that larger companies have a higher weighting in the index and therefore can have a greater impact on returns. In 2023, the Magnificent 7 (Mag 7) dominated the S&P 500 returns. The Mag 7 made up approximately 30% of the S&P 500 and consisted of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. The S&P 500 returned approximate 26% in 2023, and the Mag 7 was responsible for 18% of the 26%. (Forbes)
In 2024, Tesla and Apple are underperforming the S&P 500 and the Mag 7 is seldom mentioned. Instead, all eyes are on Nvidia. Through the first six months of 2024, Nvidia has increased in value 149%. At the end of the second quarter, it made up 6.61% of the S&P 500 and was responsible for almost a third of the approximate 15% return of the S&P 500 for the first six months of 2024. Four other large tech stocks in the index (Alphabet, Amazon, Meta, and Microsoft) are responsible for around 4% of the S&P 500 return. So, five large tech stocks in the S&P 500, making up around 24.6% of the S&P 500 weighting, were responsible for approximately 8.5% of the 15% return of the index. The other 495 stocks in the S&P 500 had a return of 6.7%. If your portfolio did not have a similar weighting in the stocks above, it is unlikely that your returns were close to the S&P 500.
For the past 18 months, the S&P 500 has returned just over 45%. How does that performance compare to the “broad market”? Let’s define the broad market as large-cap stocks, mid-cap stocks and small-cap stocks using the following indexes:
| Large-Cap | Mid-Cap | Small-Cap | |
|---|---|---|---|
| Ticker | RSP | IWR | IWM |
| Index | **S&P 500 Equal Weight |
Russell Mid-Cap | Russell 2,000 |
| # of Stocks | 500 | 800 | 1,975 |
| Market capitalization of stocks | Over $10 billion | $2 billion to $10 billion |
$250 million to $2 billion |
| % of assets in top 10 holdings | 2% | 6% | 6% |
| 2023 return | 13.70% | 17.06% | 16.84% |
| 2024 return thru June 30th | 4.96% | 3.99% | 1.62% |
| 18 month return (calculated) | 19.34% | 21.73% | 18.73% |
| Underperformance vs SPY last 18 months | -26.07% | -23.68% | -26.68% |
| Worst prior 2 year performance vs SPY | -7.84% | -8.49% | -16.19% |
| * For illustrative purposes only ** The S&P 500 Equal Weight index includes the same stocks as the cap weighted S&P 500,but all stocks have an equal weight of approximately 0.20%. No large stocks dominate the index. |
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From the chart above, you can see that the broad market indexes underperformed the S&P 500 return of 26% for 2023. For 2024 through June the underperformance is even more stark for the broad indexes versus the S&P 500’s 15% return. Notice that for the last 18 months each broad market index is trailing the S&P 500 by more than 23%. This underperformance far exceeds the previous worst two year period.
Knowing this, you might think that the S&P 500’s returns have handily beaten the broad market indexes over time. In fact, the broad market indexes have higher returns than the S&P 500 from their inception to 2023 (21 to 24 years). $100 invested in each broad market index at their inception was worth the following compared to the S&P 500 as of 12/31/23:
| SPY | RSP | IWR | IWM | |
|---|---|---|---|---|
| S&P 500 | Russell | Russell | ||
| S&P 500 | Equal Weight | Midcap | 2000 | |
| 2000 to 2023 | 502 | 575 | ||
| 2001 to 2023 | 556 | 748 | ||
| 2003 to 2023 | 803 | 847 |
Over long periods of time, the broad market indexes have each performed better than the S&P 500. For the last 18 months, though, the S&P 500 has crushed the other indexes. Will the S&P 500 outperformance continue? In prior years of S&P 500 outperformance, the broad market has often come roaring back. For the most part, the broad market is more sensitive to interest rates than the large tech companies. If rates are cut in the next two quarters, we could see the broad market outperform the S&P 500.
It is also entirely possible that in the next few months, with a slowing economy and political uncertainty, the stock market takes a breather or suffers a pull back. In that scenario, the S&P 500 could perform worse than the broad market. It is likely that the historic underperformance of the broad market indexes relative to the S&P 500 will come to an end in the second half of the year.
From the Greater Fool website by Garth Turner – “You know what they say: When something can’t continue forever, it won’t”.
Disclosures
The opinions expressed are those of NBZ Investment Advisors, LLC (“NBZ”). The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.
The information presented herein has been obtained from sources believed to be reliable, but NBZ does not warrant its completeness or accuracy. Figures, opinions and estimates reflect NBZ’s judgment on the date hereof and are subject to change at any time without notice. Projections are not guaranteed and may vary significantly.
The illustration shown in this blog is for illustrative purposes only and does not guarantee success or a certain level of performance. This material is not financial advice or an offer to buy or sell a particular security. The volatility (beta) of an account may be greater or less than its respective benchmark. It is not possible to invest directly in an index.
NBZ is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about NBZ’s investment advisory services can be found in its Form ADV Part 2, which is available at nbzinvest.com or by calling (865) 584-1184. NBZ-24-02.
