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How do the largest companies in the S&P 500 index perform before and after joining the top 10?

Robust performance and significant growth in market capitalization propels large-cap names into the top 10, but their subsequent performance relative to the index has typically faltered.

Top 10 names chart

Since January 2023, U.S. equity market performance has been driven by a handful of the largest names in the S&P 500. Over the past few years, these companies have taken on myriad names, morphing from the acronyms “FAANG” or “FAAMG” into the “Magnificent 7,” to name a few. In fact, the top 10 names in the S&P 500 currently represent about a third of the index.

However, as shown in the chart above, these names are unlikely to outperform the broad market indefinitely. The chart above illustrates the return of the top 10 stocks by market cap over various time frames. The performance of those stocks typically outpace the index’s return in the years leading up to their entry into the top 10, outperforming by nearly 15 percentage points per year in the preceding three-year period. However, once a stock reaches the top 10, the average performance advantage has dissipated, and subsequent returns have been more comparable to — or even lagged — the return of the index. Even so, the subsequent underperformance has generally been much less pronounced than the prior outperformance, lagging the market by an average of about 1% per year in the subsequent three- and five-year periods.

Why does this matter? While the top few stocks in the S&P 500 have carried performance for much of the past year and a half, that dynamic is unlikely to persist indefinitely. Remaining broadly diversified rather than concentrating one’s portfolio in recent market leaders remains the more prudent strategy for long-term investors.

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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