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The New Bull Market? Highlighting a Divergence in Equity Index Performance

“For the loser now / Will be later to win” 

Bob Dylan

While equity markets ended the second quarter of 2023 on a positive note (S&P 500 +8.3%; DJIA +3.4%; NASDAQ +12.8%), not all stocks joined in on the rally. In fact, nearly half of S&P 500 components saw no price appreciation whatsoever between the end of the first and second quarters. So, how did all three major indices manage to post positive returns in Q2? The answer largely lies in how they are constructed.

As a reminder, both the S&P and NASDAQ are market cap-weighted indices, while the Dow Jones Industrial Average is price-weighted. Larger companies (or in the case of the DJIA, companies with higher share prices1), carry a greater weight in each respective index and, in effect, have more influence on indices’ performance. Historically, any one company’s impact on an index’s overall performance was generally negligible over the long run, as the breadth and diversity of the index typically offset short-term swings among underlying components. However, the rise of so-called mega cap stocks, which uncoincidentally tend to fall in the technology or tech-adjacent sectors, has changed the composition of market cap-weighted indices—and thus their performance—substantially.

Take the S&P 500 for an example. Over the last decade, the concentration of the S&P’s top ten components has risen from a cumulative weight of 18 percent in the index to roughly 30 percent. Moreover, the five largest companies in the S&P 500 now account for nearly one quarter of the entire index, twice the level of concentration of the index in 1990, the first year such data was available.2 These companies performed exceedingly well through the first half of 2023, in turn growing ever larger while significantly boosting overall index performance. Conversely, the remaining 495 stocks in the S&P gained a relatively small amount, on average (Figure 2). 

This divergence is further illustrated by the gap in performance between the S&P 500 and the “equal weight” version of that index, which does not consider market capitalization and instead allocates a flat 0.2% to each component. As shown in Figure 3, the equal-weight S&P meaningfully trailed the market cap-weight S&P throughout the second quarter.

But what can be made of this? In short, while it appears as though the market has “run up,” with the S&P 500 essentially regaining all of the ground it had lost since early 2022, plenty of stocks remain well below their 52-week highs. In fact, nearly two-thirds of the components in the S&P are down more than 10% from their near-term highs, while roughly one-third are more than 20% below recent peaks. Many such stocks fall under less cyclical and often overlooked industries, outside of the record-breaking, headline-making performance of the tech, communication services, and consumer discretionary sectors—which also dominate the tech-heavy NASDAQ, helping to explain much of its outperformance so far this year (Figure 4).

All of this makes for a lopsided market, but one in which value can be uncovered by looking underneath the hood of broader indices. As we saw toward the end of the second quarter (noted above), momentum across the best performing sectors is beginning to slow, with the former “laggards” picking up much of the slack. Stocks that have sat out the recovery thus far now look even more attractive from a valuation standpoint, a certain benefit in either a bull or bear market. 

Should the upcoming earnings season and economic data cycle prove reasonably robust, it could be a positive catalyst for the “bottom end” of the market (for instance, the other 490 or so names in the S&P 500). Conversely, signs of economic weakness will likely have the greatest negative impact on companies with lofty valuations, many of which have been driven higher by recent gains.

For those that feel they may have already missed this year’s rally, fear not. The stage is set for discerning, valuation-conscious investors to take the lead in the second half of 2023.


1 While the DJIA is price-weighted, it is adjusted by a factor (known as the “Dow Divisor”) that mitigates the impact of stock splits so that weightings are not affected by such non-performance related changes.

For more insight on the concentration of the S&P 500, see the Addendum section at the end of this piece.


Another way to look at the information above is to consider the sheer size of the seven largest S&P 500 components relative to other companies and industries in the index. These seven companies (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta) are collectively larger than the 365 “smallest” companies in the S&P combined, including major household names like Target, Ford, General Mills, Hilton, and many others (see below).

Largest 7 vs. Smallest 365 S&P 500 Components

Furthermore, the market capitalization of Apple alone is greater than the whole of pharmaceutical, aerospace & defense, hotel, railroad, auto manufacturing, homebuilding, airline, and casino industries, just to name a few. When passively-managed investments are tied to an index such as the S&P 500—through a low-cost ETF or mutual fund, for example—investors must be very careful to ensure their portfolios are properly diversified. The effective number of underlying holdings is likely far fewer than most realize—precisely why Boston Research & Management emphasizes a “know what you own” mentality when it comes to building personalized portfolios.