Reading between the lines of the stock market rally


The S&P 500’s narrow leadership has camouflaged fairly paltry returns from most of the index. How may the phenomenon impact the investing environment?


June 8, 2023

By Kelly Bogdanova and Ben Graham, CFA

At nearly the midway point of the year, the S&P 500 Index has proven surprisingly resilient despite numerous headwinds. These include multiple Fed rate hikes amid economic uncertainty, instability in the U.S. regional banking system, and corporate earnings expectations that have been, until recently, on the decline.

Despite this resiliency, the S&P 500’s rally doesn’t necessarily match what’s going on inside diversified equity portfolios.

That’s because a narrow group of stocks, mostly in technology-related industries (we call them the “Big 7” stocks), is trouncing the overall index:

  • The S&P 500 is up 12.0 percent including dividends on a year-to-date basis.
  • But the Big 7 stocks – Alphabet,, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla – are up an average of 69.0 percent!
  • The rest of the stocks in the S&P 500 are up only 2.5 percent year to date, on average.

It goes without saying that this is a whopping disparity.

Big 7 stocks have absolutely dominated S&P 500 total returns so far in 2023

2023 YTD performance including dividends, scenario- and weight-adjusted (%)

Big 7 stocks 2023 YTD performance

Bar chart showing the S&P 500 year-to-date performance in four scenarios through June 7. 2023. The Big 7 stocks (Alphabet,, Apple, Meta, Microsoft, Nvidia, and Tesla) have returned 69%, on average. The S&P 500 has returned 12%. The S&P 500 excluding Apple (the largest stock by market cap in the S&P 500) returned 10.6%. The S&P 500 excluding the Big 7 returned 2.5%.

Note: Big 7 comprises Alphabet (both share classes),, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla; “ex” stands for excluding.

Source – RBC Wealth Management, FactSet; data through 6/7/23

The heavy lifting

This phenomenon is having an outsized impact on S&P 500 performance in two ways.

First, the Big 7 stocks have either large or very large market values (market capitalisations), and the S&P 500 is a capitalisation-weighted index – meaning the larger stocks have a greater influence on the index’s returns. So, Big 7 performance naturally impacts the S&P 500 more.

Second, the S&P 500 is currently highly concentrated. The largest stocks within the index (which includes many of the Big 7) represent an unusually high share of the S&P 500’s total capitalisation by historical standards.

In practical terms, the combination of these two factors means that Big 7 stocks have represented an overwhelming proportion of S&P 500 returns recently.

Of the 12 percent year-to-date gain, the Big 7 represents 84.1 percent of that return. The other 496 stocks in the S&P 500 represent only a paltry 15.9 percent of the index’s return so far this year. The pie chart illustrates specifically how the individual Big 7 stocks are influencing the overall index.

Big 7 stocks represent a big chunk of S&P 500 returns

Proportion of year-to-date returns within the S&P 500 including dividends, by Big 7 stocks versus the other 496 stocks*

Proportions of year-to-date returns within the S&P 500

Pie chart showing the proportion of year-to-date returns within the S&P 500 including dividends, by Big 7 stocks versus the other 496 stocks. The S&P 500’s YTD total return is 12%. The pie chart shows that Apple represents 18.7% of that return, Microsoft 16.5%, NVIDIA 14.7%, Alphabet 10.1%, 8.8%, Meta Platforms 8.4%, and Tesla 6.8%. Collectively, this adds up to 84.1% of the returns. The other 496 stocks in the S&P 500 represent only 15.9% of the returns so far this year.

* There are currently 503 stocks in the S&P 500 Index

Source – RBC Wealth Management, FactSet; data through 6/7/23

Is the performance disparity deserved?

In hindsight, there are logical, valid reasons why the Big 7 has outperformed the S&P 500, in our view.

  • Big 7 revenue growth, earnings growth, margins, and free cash flow trends in the past 12 months have significantly outpaced the S&P 500.
  • Positive consensus earnings estimate revisions in the last three months also have exceeded the broad index.
  • Consensus earnings and revenue growth forecasts for the next 12 months are well ahead of the rest of the S&P 500.
  • The Big 7 has benefited from investor interest and fund flows into the artificial intelligence theme, as these stocks have exposure to this technology.

However, the sheer magnitude of the outperformance – the Big 7 average return of 69 percent versus only 2.5 percent for the rest of the S&P 500 – seems overdone, in our assessment.

During the rally, Big 7 valuations have increased meaningfully to near the peak levels of the past couple years relative to the S&P 500. We think it’s unlikely the ultrafast-paced revenue and earnings growth that some Big 7 companies have been recording will persist over the long term. Large companies that grow earnings significantly, even for a few years, typically can’t replicate such a robust pace for five or 10 years.

What about future S&P 500 performance when the market is highly concentrated?

The straightforward answer to this question is that it depends on how one analyzes the data.

RBC Capital Markets, LLC’s Head of U.S. Equity Strategy Lori Calvasina studied the influence of the 10 largest market-cap stocks in the S&P 500 since 1990. She found that periods of high concentration (when the largest stocks represented the greatest share of S&P 500 market capitalisation) occurred in different types of circumstances – some stressful for the equity market and some not – and these episodes were not necessarily a signal for future market performance.

She wrote, “While we understand the logical risks that accompany concentrated markets and those with narrow leadership, we haven’t been convinced that there’s really a signal for forward performance to be gleaned on this issue.”

However, the research outfit Bloomberg Intelligence sliced and diced the data differently and came up with different results. It analyzed the market concentration of the five largest stocks since 2000 and determined the S&P 500’s rolling forward 12-month returns.

It found that periods with the lowest concentration showed an average S&P 500 price return of nearly 14 percent over the next year. When concentration was the highest – like it is today – it found that S&P 500 returns were more muted, almost six percent in the year ahead.

Plan and act, don’t react

While the S&P 500’s 12 percent year-to-date total return looks pretty good on the surface, there are currents underneath that may be driving many portfolios to underperform the index.

We believe it’s important to remember that although market conditions like these can persist for a while and be painful for investors with diversified portfolios, equity market performance drivers ebb and flow over time.

Having a plan in place and sticking to it during times such as these is of paramount importance, in our view.

Doing so helps ensure that when out-of-favour styles – to which many portfolios may be currently exposed – cycle back into favour, properly positioned investors will be more likely to reap the benefits that may have been elusive during this period of narrow leadership.

We’re already seeing signs that market performance is starting to broaden out.

This publication has been issued by Royal Bank of Canada on behalf of certain RBC ® companies that form part of the international network of RBC Wealth Management. You should carefully read any risk warnings or regulatory disclosures in this publication or in any other literature accompanying this publication or transmitted to you by Royal Bank of Canada, its affiliates or subsidiaries.

The information contained in this report has been compiled by Royal Bank of Canada and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgments as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Every province in Canada, state in the U.S. and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, any securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.

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