Top line
The S&P 500 just had its best May in years, but the rally was highly concentrated in just a handful of stocks, as the richest stocks continued to get richer and the middle class got, well, richer but at a pace Slower.
Six trillion-dollar technology companies made up three-quarters of the S&P 500's gains this month.
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Key facts
The S&P's nearly 4% gain last month marked its best May since 2009 and the second-best May in the past 20 years, according to FactSet data.
But for investors in individual companies, it was an uneven month: The S&P, which tracks the total change in the market capitalization of its 500 members and is therefore biased toward the largest companies, outperformed the S&P 500 about the same. weighting, which considers each of the 500 stocks equally, for the fifth consecutive month of 2024.
The equal-weighted S&P rose just 1% in May, widening the gap between the regular S&P (up 10% so far this year, including dividends, up 39% since the beginning of last year) and its weighted counterpart the same (4%, 19%).
Unsurprisingly, it's top stocks that fueled the S&P 500's rally, as Microsoft, Apple, Nvidia, Alphabet, Amazon and Meta, the six West Coast tech leaders that are the only U.S. companies valued at more from 1 trillion dollars, they amounted to a whopping 1.3 trillion dollars. in market capitalization this month, representing a ridiculous 76% of the index's total gains.
That sextet, which made up six of the infamous “magnificent seven” before the term fell out of favor when the lagging returns and profits of the seventh member, Tesla, made it the odd man out, has accounted for 40% of the S&P's market value. won this year. an underestimated proportion since the S&P changed lower market cap Whirlpool and Zions Bancorp for Super Micro Computer and Deckers in March.
That raises its weighting in the index from 28% at the beginning of the year to 30%, as the S&P inches toward its highest level. from the Great Recession, according to Bank of America research that tracks the discrepancy between the market-cap-weighted S&P and its equal-weighted cousin.
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Tangent
The past year and the first five months of 2024 have been a great period for most long-term investors in US stocks, but those most exposed to mega-cap technology have fuller bellies. If you invested $1,000 each in Microsoft, Apple, Nvidia, Alphabet, Amazon, and Meta stocks at the beginning of last year, you would now have about $18,500. A $6,000 investment in the S&P 500 early last year would leave you just under $8,400, and a $6,000 investment in the equal-weighted S&P would now be worth about $7,100, evidence of the uneven returns offered amid the latest stock market rise. .
Against
It's easy to forget in boom times, but arguably the biggest appeal of investing in exchange-traded funds (ETFs) that track broad indices like the S&P 500 is not matching the best-performing stocks, but protecting against losses during down periods. . It may be hard to remember, but we're just 17 months away from the stock market's worst year since 2008, when the S&P 500 fell 19%, the equal-weighted S&P fell 13%, and the Dow Jones Industrial Average fell 9%. in 2022. All of those indices posted better returns that year than each of the six aforementioned tech titans, whose losses ranged from Apple's 26% to Meta's 64%.
Key background
The stock market rally over the past year and a half has generally come as investors dismissed expectations of a prolonged recession and celebrated the downward trend in inflation, which should eventually lead to lower interest rates, a boon. for stocks as declining rates tend to decline. generate higher profits thanks to lower corporate borrowing costs. The reason tech stocks benefited even more sharply from improving sentiment is because of everyone's favorite buzzword: artificial intelligence. Six trillion-dollar tech super companies became very attractive for their potential to turn the AI hype into future profit potential. Nvidia, which designs more than three-quarters of the semiconductor chips that power generative AI technology, is the clearest example of what the rise of AI can mean for profits, as it just reported that its profits multiplied by seven thanks to the high corporate demand for its products. .
Surprising fact
The S&P's strong returns this month contradict the well-known adage“sell in May and be gone,” referring to the historical notion that stocks underperform in the summer months before recovering in the fall and winter.
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