The answer to the common question, “how is the US stock market doing and what are its prospects for the rest of the year?” is never as straight forward as it seems. The US market includes a combination of benchmarks with divergent track records and future prospects. Consider the key US indices and their performance year-to-date through 5/31/23:
| US Stock Market Index | YTD Performance (5/31/23) |
| S&P 500 (market-cap-weighted) Index | +8.9% |
| S&P 500 (equal weight) Index | -0.6% |
| S&P MidCap 400 Index | -1.0% |
| S&P SmallCap 600 Index | -2.7% |
| Dow Jones Industrial Average | -0.7% |
| NASDAQ Composite | +23.9% |
| Russell 2000 Index | -0.7% |
| Source: FactSet |
This snapshot clearly illustrates a dichotomy: while one index has flourished, most have floundered. Notably, the technology-dominated NASDAQ Composite has rocketed +23.9%, which may seem surprising given its reputation as being highly sensitive to negative macro conditions. This prompts the question: why have these stocks soared amidst aggressive Federal Reserve interest rate hikes, rampant inflation, predictions of a US recession, banking industry turmoil, and a sluggish global economy? The data suggests that some investors, in their pursuit of relative performance, have needed to ignore these significant red flags. Consequently, risk-averse investors committed to a diversified portfolio are fighting an uphill battle in achieving competitive relative performance.
The pronounced disparity between the performance of the market-cap-weighted S&P 500 Index and its equal weight counterpart is primarily the consequence of the stellar performance of the largest companies – perhaps to an unprecedented degree. The six largest companies have been particularly impactful:
| Company | YTD Performance (5/31/23) | Market Capitalization ($B) |
| Alphabet | +38.7% | 1,563 |
| Amazon | +43.2% | 1,237 |
| Apple | +36.8% | 2,788 |
| Meta | +120.1% | 586 |
| Microsoft | +36.3% | 2,442 |
| NVIDIA | +159.1% | 935 |
| Source: FactSet |
These giant companies have an aggregate market cap of $9.4 trillion, which constitutes 25.8% of the S&P 500 market-cap weighted index. A mere 12% of S&P 500 stocks outperformed the index over the past 60 days, as of 5/26/23 (source: Schwab). Only three of the industry sectors (communication services +33.0%, technology +34.4%, and consumer discretion +18.9%) have posted positive returns year-to-date. This stands in sharp contrast with a -11.7% plunge in the energy sector and a -9.1% drop in the utilities sector, with the remaining five sectors in negative territory.
Why are these extraordinary trends happening and will they continue? While there is no definitive answer, a possible explanation is that many investors anticipate a robust recovery from the dire conditions of 2022 and are willing to overlook a possible recession in order to make sure they do not miss the new bull market when it comes. In addition, the mega-cap stocks mentioned above are benefiting hugely from the recent frenzy surrounding artificial intelligence. We are concerned, however, that this extremely narrow market leadership is not sustainable. This investor behavior is more akin to the mania seen at the end of bull markets, such as 2000, 2008, and 2021. In our estimation, a restored bull market will include broad participation, and thus we continue to recommend investors maintain diversified portfolios.