After a brutally volatile year, stock market investors hope for a better performance in 2023. While the S&P 500 might suggest the bad days are yet to go, a closer look at the index shows that most of its stocks are in the midst of a big rally. But why isn’t the S&P 500 bouncing back?
Big Tech Stocks Drag S&P 500 Down
Cooling inflation, low unemployment, and China’s move to reopen its economy have helped somehow shore up investor confidence in the stock market so far this year. This is evident from the more than 20% rally in about three-quarters of the stocks in the S&P 500 index from their 52-week lows.
Wynn Resorts and Boeing Co. lead the list of top gainers, which have both surged more than 60% in the past three months alone. Despite the slightly impressive performance of certain stocks, the S&P 500 benchmark is down 17% from its record high set on January 3, 2022. But why?
The S&P 500 index is weighted by market capitalization. In simple terms, a company’s valuation determines how much influence it has over the index’s performance. Therefore, each listed company on S&P 500 doesn’t represent 1/500th of the index.
The five largest American tech companies, including Alphabet (Google), Amazon, Apple, Meta (Facebook), and Microsoft, also referred to as the Big Five, are responsible for nearly half of the S&P 500’s losses over the past 12 months due to their ugly performance.
More specifically, Apple and Microsoft, each with a market cap of around $2 trillion, have a combined weighting of more than 11% in the S&P 500. That gives them more influence on the index than all of the energy, materials, and utilities companies in the benchmark combined. Similarly, American Airlines Group’s 34% gains this year does little to push the index higher due to its 0.03% weighting.
Analysts Are Looking at Equal-Weighted Index to Analyze Market
To get a clearer view of the market, some experts are looking at the equal-weighted version of the S&P 500. As its name implies, this index gives the same importance to each stock in S&P 500 regardless of their market capitalization.
Dan Wantrobski, director of research at Janney Montgomery Scott, believes the equal-weighted index is essential because it offers a “deeper view” into the overall recovery. “This gives us more confidence that stocks should continue to base/bottom this year,” he said.
The equal-weighted version of the S&P 500 is beating the original index by the widest margin since 2019 and is up 17% since hitting a low on September 30. In comparison, S&P 500 is up by around 4.5% year-to-date despite some impressive rallies.
Among the best performers in the S&P 500, communication services and consumer discretionary stocks continue to stand out. Companies like Warner Bros, United Airlines Holdings, and Carnival Corp. have rallied more than 20%.
As reported, inflation cooled down to 6.5% in December, compared to the November CPI of 7.1%. Furthermore, Core CPI, which does not take volatile food and energy prices into account, fell to 5.7% from 6% in November. Investors hope that a decline in inflation could put pressure on the Fed to slow down rate hikes, which could further benefit the stock market.
This article originally appeared on The Tokenist