Published July 5, 2024
Below, we offer Delta’s analysis of the top S&P 500 stocks year-to-date. The index has become increasingly over-weighted to the top six stocks in the market. Those six stocks now account for 30% of the index. This concentration has come from two factors: excitement over AI and the fact that megacap tech is regarded as a defensive position in the face of economic slowdowns. Thus, these high-growth stocks, with massive financial resources, have become the “safe” place to be in the market. You want economic growth, buy these stocks. You want safety, buy these stocks. That investment approach continues to work to the benefit of our favored Nasdaq 100 (QQQ) index.
Here’s Delta’s analysis:
“The S&P 500 was up +15.2% for the first six months of the year. The index is market cap weighted, meaning larger companies have more significance in its performance. When larger/mega cap stocks perform well, the S&P 500 Index tends to outperform the average stock within the index. In contrast, the Equal Weighted S&P 500 ETF (RSP) was up +5% during the same period. Notably, the top ten stocks in the S&P 500 account for 36% of the index’s total weight, whereas the top ten stocks in RSP make up roughly 2%.
Eight of the ten largest companies in the S&P 500 are technology firms. Apple, the largest stock holding in Berkshire Hathaway—a holding company with its core business in insurance—significantly influences this trend.
However, this phenomenon isn’t new. Large cap growth stocks have been outperforming large blend (aka core) stocks each of the past 10 years. Over the past decade, large cap growth stocks have annualized returns of 16.4% compared to 12.9% for large blend stocks. When comparing large growth to large blend and large value stocks, the disparity is evident, with mid cap and small cap performances lagging even further.
Performance Analysis
Only 130 companies, or 26% of the S&P 500, have outperformed the index, meaning 74% did not. Among those underperforming, nearly half have posted negative returns year-to-date (YTD). Below, we highlight some of the winners and losers YTD:
Atlanta Fed’s GDPNow GDP Estimate Falls
The latest GDPNow estimate for real GDP growth in the second quarter is 1.5%, down from 2.7% last week and 3.9% at the end of April. The average forecast for Q2 since the first estimate at the end of April is 2.8%. Contributing factors for the recent decline include weaker reports from the Census Bureau, the Bureau of Economic Analysis, the Institute for Supply Management, the ISM Manufacturing Index, and Construction Spending data.
Market Update
The market-leading Nasdaq 100 (QQQ) began the second half of the year with a +0.8% move higher Monday despite a sharp move upward in U.S. Treasury rates. There was no follow-through in the interest rate jump giving stocks room to follow EV car maker Tesla upward Tuesday. The electric car maker surprised analysts with a better-then-expected delivery report Tuesday. The Nasdaq 100 popped another +0.8%. Wednesday brought a quiet pre-holiday session with labor reports supporting the “soft landing” economic scenario favorable to stocks. The Nasdaq added another +0.9% while interest rates tumbled on the labor market news. After Thursday’s July 4th celebration, stocks had their own party Friday. The monthly jobs report showed another strong gain in hiring while unemployment also ticked slightly upward, suggesting increasing slack in the labor market. That slack could slow down wage growth and give the Fed room to begin cutting interest rates. Stocks added an additional +1.0% Friday giving the Nasdaq another record close.
For the week, the S&P 500 (SPY) gained +1.91% while the Nasdaq 100 (QQQ) jumped +3.56%. Small cap stocks (IWM) continue to dramatically underperform, this week falling -1.00% despite interest rates dropping back this week.
Warm wishes and until next week.