Think the S&P 500 undefined is hanging out around all-time highs right now? Think again.
Yes, nominally, the S&P 500 is hovering right at record highs. But, because of the way the S&P 500 is calculated, that doesn’t mean what most people think it means.
A few massive names have generated virtually all of the S&P's performance in 2020.
Back in June, we took a look at why the average S&P 500 stock was down much more than most people realized (click here for the rundown).
The reason? A handful of big stocks – mainly tech stocks – have generated most of the performance this year:
The ten biggest stocks in the S&P 500 at the start of the year have been steadily adding up to a bigger chunk of the index. More than half of those stocks are tech sector names like Apple (AAPL) - Get Apple Inc. (AAPL) Report, Microsoft (MSFT) - Get Microsoft Corporation (MSFT) Report, Alphabet (GOOGL) - Get Alphabet Inc. Class A Report (GOOG) - Get Alphabet Inc. Class C Report, Amazon (AMZN) - Get Amazon.com, Inc. Report and Facebook (FB) - Get Facebook, Inc. Class A Report – plus a few big non-tech stalwarts like Berkshire (BRK.B) - Get Berkshire Hathaway Inc. Class B Report and J&J (JNJ) - Get Johnson & Johnson (JNJ) Report.
The chart above shows what it would look like if the index were rebalanced daily – those original ten giant names add up to about 30% of the S&P right now.
Take them out, and the market looks dramatically different:
In the chart above, you’re looking at the cap-weighted performance of the ten biggest stocks at the start of the year versus the other 490.
The red line is what the S&P 500 would look like without those ten stocks…
At last count, the ten largest S&P 500 stocks are up 25% so far this year, on average. Exclude them, and the S&P 500 is down 3.4%.
But what’s most striking is what’s been happening more recently – since June, while the biggest stocks have been pulling the S&P towards record highs from February, the S&P minus those ten names is still lower than it was just two months ago.
The biggest takeaway is that momentum is still very much alive and well this summer – ignore the trend at your peril.
It’s an important reminder that buying what’s working is a sound strategy in crisis markets.
Footnote: For anyone curious, here’s the ten stocks that made up the “buy list” at the start of 2020…