Power at the Top – 10 Stocks Drive S&P 500 Performance

by | Jan 5, 2024 | Financial Planning, Market Commentary, Market Performance

It is safe to look at your investment account statements again. 2023 was a very strong year for stocks. Especially when measured by the Standard and Poor’s 500 Index(S&P 500). The S&P 500 Index had a total return of 26.2% for the full year.

Other major indices had relatively strong returns, however they were not as strong as the S&P 500 Index. Due to this discrepancy investment accounts diversified across the investment universe did well, but not nearly as well as the S&P 500 Index. The Dow Jones Industrial Average up 16.0%, Russell 2000 Index of U.S. small cap stocks up 16.8% and the MSCI ACWI ex-US Index of international stocks up 15.7%.

Over the years we have discussed stock leadership by a small number of stocks. Do you remember the days of FANG leadership (Facebook now Meta, Amazon, Netflix and Google)? High growth companies with strong cash flow drew investor funds again in 2023. This is undoubtedly the top story of investment performance for the calendar year. The top ten stocks in the S&P 500 as of 12/31/2023 represent 32.1% of the total S&P 500 Index. This is the largest representation in over 25 years.

The top ten stocks as of 1/1/2023 followed throughout the full year achieved an outstanding total return of 62%. These top ten stocks include Apple, Microsoft, Amazon, Nvidia, Alphabet (GOOGL), Berkshire B, Alphabet (GOOG), Meta, Exxon Mobil, United Health Care and Tesla. The rest of the 494 companies that make up the S&P 500 Index had a total return of 8%.

The current forward price/earnings ratio is 26.9x for the top ten versus 17.1x for the rest of the index. The price/earnings ratio is an indication of how much investors are willing to pay for future growth. A higher number will require higher future earnings growth to justify the current price.
 
In the year ago newsletter I stated “there’s no denying that most stocks are on sale to the tune of 15-30%, or more, from their high prices”. This certainly played out throughout 2023. Looking into 2024, prices are at a more normal level. Current valuations do not necessarily appear overvalued, however we certainly do not see the discount that existed at the beginning of 2023. Stock prices are more likely to follow earnings growth from quarter to quarter, leading to more moderate stock returns. Barring any major unexpected events, I do not expect the U.S. Presidential election to have a meaningful impact on investment returns.