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What drove the strong return of the S&P 500 in 2023?

The S&P 500 index returned more than 26% last year, but less than a third of its constituent stocks outperformed the index overall.

S&P 500 was a tough bogey to beat in 2023

While 2023 proved to be a robust performance year for the S&P 500 index, nearly three of every four individual stocks within the index posted a return below that of the index. Only 28% of constituents outperformed — the lowest rate since at least the late 1990s, falling well below the long-run average of 49%.

Individual stocks within the S&P 500 are weighted by market capitalization, a measure of a company’s total dollar market value. Consequently, larger market-cap companies hold a larger allocation within the index and thus have a greater influence on index performance. As we have previously discussed, seven of the largest stocks within the S&P 500 (the “Magnificent Seven”) accounted for most of the S&P 500 index returns in 2023. Conversely, the performance of most stocks that comprise the index trailed behind.
That dynamic created a challenging backdrop for active managers, as exposure to nearly 75% of the stocks in the index detracted from performance compared with an indexed portfolio. Further, any portfolio allocation to those seven names that was smaller than their representation in the index also created a drag.

As shown above, the last period of comparably concentrated index performance was soon followed by a multiyear period where the majority of individual stocks outperformed the index. While the same dynamic may not play out in the current cycle, that cycle illustrates how periods of narrow market breadth tend to be short-lived and can often quickly swing to the opposite extreme. Active managers should benefit in such an environment.

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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