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

As 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.