Looking at the 2023 returns of the S&P 500 and NASDAQ it is easy to assume that widespread, equal growth lifted these indexes to double digit gains. However, closer examination reveals that seven tech stocks with outsized capitalization had a disproportionate influence on these cap-weighted indexes.
Unlike the Dow Jones, the NASDAQ and S&P are cap weighted – meaning that each company in the index is weighted relative to its size. Seven stocks: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta represent roughly 30% of the S&P 500’s market value and nearly 40% of the NASDAQ’s. In 2023, the Magnificent Seven surged by 75% while the other 493 companies in the S&P 500 returned 12%. As a result, the index posted a 26% overall gain.
From our perspective, this concentrated growth only reinforces the importance of proper diversification. Should these companies give up their market leadership, it is important to have a portfolio that can withstand change.
