For years, mega-cap stocks have corrupted index performance. A select few mega-cap stocks in major market indices have disproportionately driven returns as their capitalization weights have grown. Investors have flocked to these growth and technology giants, propelling them to unprecedented sizes. This influx of capital, whether through direct investment or as a result of their inclusion in indices (tracked by many mutual funds and ETFs), has created a self-reinforcing cycle of rising performance and growing dominance within the indices.
The table below provides a detailed view of the contribution to return (CTR) for the SPDR S&P 500 ETF Trust (SPY), used here as a proxy for the S&P 500 index, year-to-date as of December 4, 2024. The S&P 500 has generated a total return of 29.05%, with the contributions of individual holdings reflecting the outsized impact of major technology and growth companies. NVIDIA Corporation stands out as the top contributor with a remarkable 6.09% CTR, representing 20.96% of the index’s total return. Other significant contributors include Apple (1.79%), Amazon (1.52%), and Meta Platforms (1.49%), underscoring the dominance of tech-sector giants in driving the S&P 500's strong performance.
When analyzing the distribution of returns, the top three stocks (NVIDIA, Apple, and Amazon) together contribute 9.40%, or 32.36% of the total return. Including Meta Platforms and Microsoft, the top five contributors account for 11.91%, or 41.01% of the index's total return. Expanding to the top 10 contributors, which include Alphabet (combined Class A and C), Tesla, Broadcom, and Eli Lilly, the cumulative contribution reaches 16.76%, representing 57.69% of the S&P 500's total return. This concentration of returns highlights the heavy reliance of the broader market on a select group of mega-cap companies, particularly in the technology and growth sectors.
Concentration Comes with Significant Risk
These observations emphasize the increasingly concentrated nature of the S&P 500, where a handful of high-performing companies drive a significant portion of the index's performance. While this has been beneficial during periods of strong market performance, it also highlights the potential risks associated with such reliance, particularly during market downturns or shifts in sector leadership. Notably, the Bloomberg Magnificent 7 Index (see chart below) suffered a sharp decline of approximately 49.34% from late 2021 through 2022, compared to a 25.38% decline for the S&P 500 over the same period.
The substantially lower downside risk of broader market exposure is one compelling reason to diversify equity investments, while the potential for better long-term performance is another.
A Decade of Dominance
Over the past 10 years, the S&P 500, represented below by the SPDR S&P 500 ETF Trust (SPY), delivered a total return of 247.98%. A deeper analysis of the index’s performance reveals that the contribution to returns has been highly concentrated among a handful of stocks, particularly the current constituents of the index.
The top 10 contributors, based on their cumulative impact, account for a significant 108.80 percentage points of the total return, representing 43.86% of the index’s overall performance.
The Case for Long-Term Diversification
From December 31, 1999, to December 4, 2024, the financial markets showcased remarkable trends in total returns across major indices and asset classes. The S&P 500 delivered an impressive total return of 559.25%, annualizing at 7.85%, fueled by the dominance of mega-cap stocks like Apple, Microsoft, and NVIDIA, particularly over the last decade. Interestingly, the S&P 500 Equal-Weighted Index ourtperformed the its cap-weighted relative with a return of 774.04% (9.08% annualized), reflecting the strength of broader market participation when each stock is equally weighted. This structure not only mitigates concentration risk but also, for long stretches, outperformed the market-cap-weighted index by benefiting from a more balanced contribution across sectors and company sizes.
The Russell 1000 Growth Index has demonstrated its resilience and capacity for long-term growth, even in the face of significant market disruptions such as the tech bubble bust. After enduring a challenging period, the index made a remarkable comeback, delivering a total return of 566.93% (7.90% annualized). This extraordinary performance highlights the strength of technology and innovation-focused sectors, which have been pivotal drivers of growth.
In comparison, the Russell 1000 Value Index achieved a commendable total return of 526.40% (7.63% annualized). This illustrates the consistent appeal of value investing, though it has often lagged behind during tech-driven bull markets. The divergence between growth and value underscores the importance of understanding market cycles and sector dynamics when constructing investment portfolios.
Additionally, small-cap stocks, as represented by the Russell 2000 Index, outperformed the S&P 500 with a total return of 567.41% (7.91% annualized). This performance emphasizes the potential advantages of incorporating small-cap exposure into portfolios. Smaller companies frequently deliver outsized returns, particularly during periods of economic expansion or market leadership transitions.
These trends underscore the value of diversification across investment styles and market capitalizations, enabling investors to capture opportunities in both growth-driven and value-oriented environments while also benefiting from the unique dynamics of small-cap stocks.
Insights & Implications
This long-term performance data underscores the enduring value of diversification across indices, asset classes, and equity styles. While the S&P 500’s market-cap-weighted structure delivered strong results, the nearly identical performance of the equal-weighted counterpart highlights the advantages of broader participation across sectors. Equal weighting and small-cap exposure allow investors to capture returns from underrepresented areas of the market, particularly during periods when large-cap growth stocks lose momentum.
Growth stocks significantly outperformed value stocks, buoyed by the dominance of technology and innovation, but the cyclicality of market leadership suggests that value-oriented strategies could regain favor in the future. Small-cap stocks demonstrated outsized growth potential, while bonds offered stability and income, serving as essential counterweights to equity market volatility.
Strategic Takeaways
If You Can’t Beat Them, Join Them: WBI’s direct indexing solutions allow investors to capitalize on dominant growth themes like the S&P 500 or the NASDAQ, offering exposure to their momentum while retaining flexibility and control.
If You Can’t Beat Them, Join Them...with Risk Protection: WBI’s Trend Switch Strategies (e.g., MAG7 with risk overlays) deliver market exposure with downside protection, mitigating volatility.
Diversify to Avoid Over Concentration: WBI’s Cy Multi-Manager Strategies and Power Factor SMA Portfolios enable robust diversification across equity styles, company sizes, and asset classes, focusing on consistent performance factors while avoiding over-concentration risks.
The 25-year data highlights the necessity of diversification and thoughtful strategy design for consistent, risk-adjusted returns. While mega-cap growth stocks have dominated, their concentration risks reinforce the value of a diversified portfolio. WBI offers innovative strategies—from direct indexing and risk-managed solutions to multi-manager approaches—that position advisors and their clients to thrive across market cycles.
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