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
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.
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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.