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Cracked Rearview: The Distorted Reality of the S&P 500 Index Returns in 2023

Updated: Jan 5

The S&P 500 exhibited an impressive return of nearly 27% in 2023, and its performance over the past decade was significantly influenced by a group dubbed the "Magnificent 7" (Mag7). To provide a comprehensive overview, FactSet has expanded this group to encompass the top 10 elite mega-cap stocks. This expansion underscores the pivotal role played by these top ten companies in driving the S&P 500 index's return, contributing a staggering 75% to the overall return for the year.


When we conduct a comparative analysis spanning the past decade, it becomes evident how instrumental these top 10 companies were in shaping the market dynamics of 2023. The 75% contribution to the S&P 500’s weighted average return in 2023 starkly contrasts with the 39% average contribution observed from 2014 to 2022.


Chart illustrating market performance differences
The top 10 stocks contribution to the S&P 500's return in 2023. Source: FactSet

For investors, the key takeaway is clear: the outsized return generated by the top ten largest capitalization-weighted stocks significantly impacted the S&P 500's overall performance. Without their influence, the S&P 500 Equal Weighted Index registered a more modest gain of only 11.70% for the year. Those who prudently diversified their portfolios to mitigate risk and secure long-term results likely underperformed the indices in 2023.


In a world where investors strive to keep pace with benchmark indices, the decision to opt for a diversified portfolio with a lower return might appear less appealing. However, concentrating risk in a handful of stocks to chase higher returns comes with substantial risk, which many investors are unwilling to endure, especially as losses mount. When losses exceed their tolerance threshold, investors tend to sell, often locking in losses and jeopardizing their capital.


Investors tend to have short memories, but if we extend our analysis to encompass not just one year but two, the perils of over-concentration become all the more apparent. To capture the returns of this year's Mag7, one would have had to endure a substantial loss without selling. In 2022, Mag7, S&P 500, and S&P 500 Equal Weighted were down -45.32%, -18.11%, and -11.45% respectively. Drawing from over 40 years of experience with thousands of investors, we know that very few individuals would withstand such a significant loss without seeking to protect their capital.


Chart showing market performance differences
2-Year performance disparity between the Magnificent 7, S&P 500, and S&P 500 Equal Weighted. Source: Bloomberg

What's even more astonishing to consider is that even if an investor held through the loss to attain this year's gain, their annualized return over the past two years would be less than 5.00%. This underscores the reality of the market's performance over the past couple of years, with the S&P 500 Index and the S&P 500 Equal Weighted Index returning 3.42% and 0.84%, respectively.


This review should serve as an anchor for expectations regarding market returns in 2024. The U.S. markets and economy are poised for a year of change and transition. The Federal Reserve has signaled its pause in interest rate hikes, with potential rate cuts on the horizon if inflation continues to recede and the economy weakens further. Investors have already factored in the possibility of 4-6 rate cuts in 2024. As the economy contracts, corporate earnings are expected to weaken, potentially leading to a decline in price-to-earnings multiples. This could trigger a correction in markets that have been buoyed by stocks trading at high valuations.


However, contrarians hold a different view, suggesting that lower interest rates could ignite a market rally, a pattern observed each time the Fed has cut rates over the past decade. They also point to trailing data indicating a stronger economy than consensus forecasts, raising the possibility of a successful economic "soft landing."


Historically, market corrections have often been sparked by unexpected events or information not accounted for in consensus expectations. In light of this, we anticipate a shift in overall market performance, with value and dividend stocks taking the lead for the first time in over a decade. While AI will continue to drive certain segments of the information technology sector, we anticipate that Mega Cap leaders may see a moderation in their valuations.


In summary, caution should prevail in the quest for returns this year, especially given the backdrop of ongoing conflicts. Risk management and capital preservation could be of paramount importance in the early part of the year, as markets adjust to potential shifts in Fed policy, including the possibility of maintaining higher interest rates. With rate cuts already priced in, a "do-nothing Fed" could trigger a significant negative market response.



At WBI, our core philosophy revolves around prioritizing capital protection while seeking solid long-term results. It is essential to remember that markets are influenced by a multitude of factors, and we must allow them to unfold naturally. We extend our heartfelt wishes for peace and prosperity in the New Year.

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Unless otherwise indicated all performance is sourced from Bloomberg.

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