By Tim Courtney, Chief Investment Officer
Most investors are familiar with indexes, ETFs, and mutual funds — baskets of stocks or bonds wrapped up nicely into a single line entry with a single price. On any given trading day, it’s clear how the S&P 500 index is doing. However, what’s not so clear is how the 500 individual companies within the index wrapper are doing.
So, we decided to unwrap the 500 companies within the S&P and see how the average stock in the index behaves each year. Key questions guided our study: Are roughly 50% of the companies outperforming the index with the other 50% underperforming? And how many companies each year generate negative returns versus positive returns?
The 6-year time frame we reviewed (January 2018 through December 2023) was a pretty typical period for the S&P 500. Returns were positive in four of six years (right on average) and the annualized return was about 11% (just slightly higher than the long-term average). Here is what we found when we looked at how the individual companies performed:1
- On average, just under 60% of stocks underperformed the S&P 500 each year.
Nearly 300 of the 500 names in the S&P 500 underperformed the index itself, on average, in any given year. In 2023, the number of underperformers was 378. - On average, nearly 40% of stocks generated negative returns each year. Nearly 200 of the 500 stocks in the index generated negative returns on average in any given year. This persisted even in years with strongly positive returns like 2020 and 2023. In 2023, the S&P 500 index was up 26%, yet 166 of its stocks were negative.
Many investors may be surprised to see so many underperforming and negative-returning stocks each year. But these results are not abnormal – they are what we should expect to see.
There are periods of time when the market becomes obsessed with certain sectors, just like investors were very focused on the Magnificent Seven and AI for much of 2023. Much of the rest of the market barely moved for most of the year.2 But stocks with flat or negative returns in one year can see positive and outperforming returns the next. Eliminating lower-returning companies can lead to concentration and the potential for missing additive future performance.
This also serves as a lesson in what it truly means to be diversified. Diversification means that you are going to be holding some negative or underperforming positions. Those positions could be companies or sectors that are very productive and profitable yet are presently undervalued or overlooked by investors.
As we kick off 2024 with an S&P 500 more concentrated in its top ten names than it has ever been, we advise remaining diversified across assets and sectors. Diversification may cause an investor to have near-term regret that they were not more concentrated. But history shows that concentration often leads investors to have long-term regret as markets shift and returns revert. If you have questions about your portfolio, please don’t hesitate to reach out to your Exencial advisor.
Sources:
- Exencial Wealth Advisors (12/31/23) S&P 500 Index Stock Study with Morningstar Attribution Return Data
- Reuters (1/2/24) Can sizzling Magnificent Seven trade keep powering US stocks in 2024?
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
