{"id":5795,"date":"2023-06-09T00:00:00","date_gmt":"2023-06-09T00:00:00","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-us\/insightsreading-between-the-lines-of-the-stock-market-rally\/"},"modified":"2024-02-05T13:39:45","modified_gmt":"2024-02-05T18:39:45","slug":"reading-between-the-lines-of-the-stock-market-rally","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-us\/insights\/reading-between-the-lines-of-the-stock-market-rally","title":{"rendered":"Reading between the lines of the stock market rally"},"content":{"rendered":"\n<p><strong>By Kelly Bogdanova and Ben Graham, CFA<\/strong><\/p>\n\n\n\n<p>       At nearly the midway point of the year, the S&amp;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.     <\/p>\n\n\n\n<p>       Despite this resiliency, the S&amp;P 500\u2019s rally doesn\u2019t necessarily match       what\u2019s going on inside diversified equity portfolios.     <\/p>\n\n\n\n<p>       That\u2019s because a narrow group of stocks, mostly in technology-related       industries (we call them the \u201cBig 7\u201d stocks), is trouncing the overall       index:     <\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>         The S&amp;P 500 is up 12.0 percent including dividends on a year-to-date         basis.       <\/li>\n\n\n\n<li>         But the Big 7 stocks\u2014Alphabet, Amazon.com, Apple, Meta Platforms,         Microsoft, NVIDIA, and Tesla\u2014are up an average of 69.0 percent!       <\/li>\n\n\n\n<li>         The rest of the stocks in the S&amp;P 500 are up only 2.5 percent year         to date, on average.       <\/li>\n<\/ul>\n\n\n\n<p>It goes without saying that this is a whopping disparity.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-big-7-stocks-have-absolutely-dominated-s-amp-p-500-total-returns-so-far-in-2023\">       Big 7 stocks have absolutely dominated S&amp;P 500 total returns so far in       2023     <\/h3>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-2023-ytd-performance-including-dividends-scenario-and-weight-adjusted\">       2023 YTD performance including dividends, scenario- and weight-adjusted       (%)     <\/h4>\n\n\n\n<div class=\"row mb-4 migrated\">       <div class=\"col-lg-10 col-md-8 col-sm-8 col-xs-10 col-xxs-12\">         <img decoding=\"async\" src=\"https:\/\/www.rbcwealthmanagement.com\/en-us\/wp-content\/uploads\/sites\/7\/2023\/06\/reading-between-lines-en-chart-1.png\" alt=\"Big 7 stocks 2023 YTD performance\" class=\"img-fluid mb-2\" \/>         <p           class=\"sr-only\"           id=\"chart1desc\"         >           Bar chart showing the S&#038;P 500 year-to-date performance in four           scenarios through June 7. 2023. The Big 7 stocks (Alphabet,           Amazon.com, Apple, Meta, Microsoft, Nvidia, and Tesla) have returned           69%, on average. The S&#038;P 500 has returned 12%. The S&#038;P 500 excluding           Apple (the largest stock by market cap in the S&#038;P 500) returned 10.6%.           The S&#038;P 500 excluding the Big 7 returned 2.5%.         <\/p>         <p class=\"footnote\">           Note: Big 7 comprises Alphabet (both share classes), Amazon.com,           Apple, Meta&nbsp;Platforms, Microsoft, NVIDIA, and Tesla; \u201cex\u201d stands for           excluding.         <\/p>         <p class=\"disclaimer\">           Source &#8211; RBC Wealth Management, FactSet; data through 6\/7\/23         <\/p>       <\/div>     <\/div>\n\n\n\n<h2 class=\"wp-block-heading\">The heavy lifting<\/h2>\n\n\n\n<p>       This phenomenon is having an outsized impact on S&amp;P 500 performance in       two ways.     <\/p>\n\n\n\n<p>       First, the Big 7 stocks have either large or very large market values       (market capitalizations), and the S&amp;P 500 is a capitalization-weighted       index\u2014meaning the larger stocks have a greater influence on the index\u2019s       returns. So, Big 7 performance naturally impacts the S&amp;P 500 more.     <\/p>\n\n\n\n<p>       Second, the S&amp;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&amp;P 500\u2019s total capitalization by       historical standards.     <\/p>\n\n\n\n<p>       In practical terms, the combination of these two factors means that Big 7       stocks have represented an overwhelming proportion of S&amp;P 500 returns       recently.     <\/p>\n\n\n\n<p>       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&amp;P 500 represent only a       paltry 15.9 percent of the index\u2019s return so far this year. The pie chart       illustrates specifically how the individual Big 7 stocks are influencing       the overall index.     <\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Big 7 stocks represent a big chunk of S&amp;P 500 returns<\/h3>\n\n\n\n<h4 class=\"wp-block-heading\">       Proportion of year-to-date returns within the S&amp;P 500 including       dividends, by Big 7 stocks versus the other 496 stocks*     <\/h4>\n\n\n\n<div class=\"row mb-4 migrated\">       <div class=\"col-lg-10 col-md-8 col-sm-8 col-xs-10 col-xxs-12\">         <img decoding=\"async\" src=\"https:\/\/www.rbcwealthmanagement.com\/en-us\/wp-content\/uploads\/sites\/7\/2023\/06\/reading-between-lines-en-chart-2.png\" alt=\"Proportions of year-to-date returns within the S&amp;P 500\" class=\"img-fluid mb-2\" \/>         <p           class=\"sr-only\"           id=\"chart2desc\"         >           Pie chart showing the proportion of year-to-date returns within the           S&#038;P 500 including dividends, by Big 7 stocks versus the other 496           stocks. The S&#038;P 500&#8217;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%, Amazon.com 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&#038;P 500 represent only 15.9% of the returns so far           this year.         <\/p>         <p class=\"footnote\">           * There are currently 503 stocks in the S&amp;P 500 Index         <\/p>         <p class=\"disclaimer\">           Source &#8211; RBC Wealth Management, FactSet; data through 6\/7\/23         <\/p>       <\/div>     <\/div>\n\n\n\n<h2 class=\"wp-block-heading\">Is the performance disparity deserved?<\/h2>\n\n\n\n<p>       In hindsight, there are logical, valid reasons why the Big 7 has       outperformed the S&amp;P 500, in our view.     <\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>         Big 7 revenue growth, earnings growth, margins, and free cash flow         trends in the past 12 months have significantly outpaced the S&amp;P         500.       <\/li>\n\n\n\n<li>         Positive consensus earnings estimate revisions in the last three months         also have exceeded the broad index.       <\/li>\n\n\n\n<li>         Consensus earnings and revenue growth forecasts for the next 12 months         are well ahead of the rest of the S&amp;P 500.       <\/li>\n\n\n\n<li>         The Big 7 has benefited from investor interest and fund flows into the         artificial intelligence theme, as these stocks have exposure to this         technology.       <\/li>\n<\/ul>\n\n\n\n<p>       However, the sheer <em>magnitude<\/em> of the outperformance\u2014the Big 7       average return of 69 percent versus only 2.5 percent for the rest of the       S&amp;P 500\u2014seems overdone, in our assessment.     <\/p>\n\n\n\n<p>       During the rally, Big 7 valuations have increased meaningfully to near the       peak levels of the past couple years relative to the S&amp;P 500. We think       it\u2019s 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\u2019t replicate such a robust pace for five or 10 years.     <\/p>\n\n\n\n<h2 class=\"wp-block-heading\">       What about future S&amp;P 500 performance when the market is highly       concentrated?     <\/h2>\n\n\n\n<p>       The straightforward answer to this question is that it depends on how one       analyzes the data.     <\/p>\n\n\n\n<p>       RBC Capital Markets, LLC\u2019s Head of U.S. Equity Strategy Lori Calvasina       studied the influence of the 10 largest market-cap stocks in the S&amp;P       500 since 1990. She found that periods of high concentration (when the       largest stocks represented the greatest share of S&amp;P 500 market       capitalization) occurred in different types of circumstances\u2014some       stressful for the equity market and some not\u2014and these episodes were not       necessarily a signal for future market performance.     <\/p>\n\n\n\n<p>       She wrote, \u201cWhile we understand the logical risks that accompany       concentrated markets and those with narrow leadership, we haven\u2019t been       convinced that there\u2019s really a signal for forward performance to be       gleaned on this issue.\u201d     <\/p>\n\n\n\n<p>       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&amp;P 500\u2019s rolling forward 12-month returns.     <\/p>\n\n\n\n<p>       It found that periods with the lowest concentration showed an average       S&amp;P 500 price return of nearly 14 percent over the next year. When       concentration was the highest\u2014like it is today\u2014it found that S&amp;P 500       returns were more muted, almost six percent in the year ahead.     <\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Plan and act, don\u2019t react<\/h2>\n\n\n\n<p>       While the S&amp;P 500\u2019s 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.     <\/p>\n\n\n\n<p>       We believe it\u2019s 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.     <\/p>\n\n\n\n<p>       Having a plan in place and sticking to it during times such as these is of       paramount importance, in our view.     <\/p>\n\n\n\n<p>       Doing so helps ensure that when out-of-favor styles\u2014to which many       portfolios may be currently exposed\u2014cycle back into favor, properly       positioned investors will be more likely to reap the benefits that may       have been elusive during this period of narrow leadership.     <\/p>\n\n\n\n<p>       We\u2019re already seeing signs that market performance is starting to broaden       out.     <\/p>\n","protected":false},"excerpt":{"rendered":"<p>The S&#038;P 500\u2019s narrow leadership has camouflaged fairly paltry returns from most of the index. How may the phenomenon impact the investing environment?<\/p>\n","protected":false},"author":15,"featured_media":5799,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"rbcwm_post_date":"2023-06-08 00:00:00.0","editor_notices":[],"rbc_url_alias":"","rbcwm_featured_desktop_image_position":"","rbcwm_featured_mobile_image_position":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[71],"tags":[115,491],"rbcwm_content_owner":[609],"rbcwm_need":[],"rbcwm_segment":[467,460,469],"rbcwm_solution":[],"rbcwm_topic":[468],"rbcwm_channel":[],"rbcwm_format":[],"class_list":["post-5795","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-analysis","tag-investing","tag-stock-market-rally","rbcwm_content_owner-pag","rbcwm_segment-business-owners-and-entrepreneurs","rbcwm_segment-individuals-and-families","rbcwm_segment-institutions","rbcwm_topic-global-insights"],"acf":{"rbcwm_subtitle":"The S&P 500\u2019s narrow leadership has camouflaged fairly paltry returns from most of the index. 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