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What’s driven the positive performance in the S&P 500 this year?

The S&P 500 has provided a solidly positive return year to date, but most of that performance has been attributable to just a handful of stocks.

S&P 500's top heavy performance chart illustrationAs shown in the chart above, the 10 largest names in the S&P 500 have achieved a disproportionately strong return relative to the rest of the index’s constituents thus far this year. In fact, the top 10 stocks have provided an average return over 30%, while the remaining companies’ weighted return are effectively flat. Such conditions are often referred to as a “thin” market — one in which market returns are largely attributable to just a handful of names. Our accompanying piece addresses the changes in the composition of the index in recent decades and how the concentration in a few names today compares over time.

Among industry professionals, a narrowly led market is often deemed less sustainable than a broad-based rally. The argument is that positive market performance driven by many companies across the size and sector spectrum is indicative of an economy that’s firing on all cylinders. The opposite may be consistent with mixed economic conditions in which certain sectors thrive while others are comparatively stagnant. Investor behavior can also play a significant role. For example, fears of a recession can drive investors toward the highest quality companies with a greater ability to sustain revenue and earnings growth. Investors may also be drawn to a “story” or emerging theme that benefits certain companies or may at least be perceived to do so. The recent, rapid emergence of developments related to artificial intelligence is a good example. Today, multiple factors are likely driving investors toward large growth and tech-oriented names.

What does this mean? Equity market performance has been solidly positive this year but conditions haven’t resembled the proverbial tide that lifts all boats. Investors should be generally pleased with the returns but recognize the risk of a reversal in fortune should those largest companies come under renewed pressure.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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