At the end of 2023 I highlighted the dominance of the top 10 stocks in the S&P 500. It is worth revisiting this topic. These 10 stocks continue to dominate the S&P 500 on into 2024.
So far in 2024, other major indices have not achieved nearly as strong returns as the S&P 500. As reported by Koyfin Performance Software, the S&P 500 has generated a price return year-to date through June 30, 2024, not including dividends, of 14.5% The Dow Jones Industrial Average is up only 3.8%, the Russell 2000 Index of U.S. small cap stocks up 0.8% and the MSCI ACWI ex-US Index of international stocks up 5.6%. In large part, this is due to strong performance from the technology-dominated top 10 stocks in the S&P 500 Index.
The top 10 stocks as of June 30, 2024, include Apple, Microsoft, Amazon, Nvidia, Alphabet (GOOGL), Berkshire B, Alphabet (GOOG), Meta, Eli Lilly, JPMorgan and Broadcom Inc. The following three stocks dropped out of the top 10 since year-end: Exxon Mobil, United Health Care and Tesla. At year-end 2023, the top 10 stocks represented 32.1% of the market weight of the S&P 500 Index. As of June 30, 2024, the top 10 stocks represent 37.0% of the S&P 500 Index. This concentration is well above the levels we have seen over the past 20 years.
The current forward price/earnings(P/E) ratio of the top 10 stocks was 26.9x at 2023 year-end, while it is now 30.3x. This is well above the 20.4x average from 1996 to present. 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. Remaining stocks are selling at a current P/E ratio of 17.6x.
The top 10 stocks are growing earnings at a faster rate than most of the rest of the S&P 500 Index, attributing 26.8% of S&P 500 earnings over the past 12 months. However, the discrepancy in value seems to be getting stretched. What does this mean for stock performance going forward?
Earnings growth remains strong for index leaders and stable for the rest of the investment universe, which may indicate this gap could persist for some time. FactSet estimates S&P 500 earnings growth of 10.9% for the S&P 500 Index over the next 12 months, with all sectors expected to achieve positive earnings growth.
If stock price returns can maintain pace with earnings growth, indicating potential 10% price growth in the next year, we could continue to see this gap persist. I do not anticipate a strong surge in value stocks any time soon; however, we may start to see more uniformity across sector performance the rest of this year versus such strong outperformance by the top growth-oriented stocks. This trend is well worth monitoring.
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