Opinion: Top 10 S&P stocks leading turnaround

During the first four months of 2023, the S&P 500 added an impressive $2.2 trillion in market value. This equates to a gain of about 9.2%, slightly more than half of the 18% it lost in all of 2022. Leading economists have been forecasting an impending recession since the Federal Reserve started raising rates last year. Considering the consensus, why is the stock market pushing higher?

Market capitalization
The S&P 500 is an index that tracks the 500 largest U.S. publicly traded companies. However, the index is not evenly distributed across all companies. Instead, it is weighted by market capitalization. Market capitalization is calculated by multiplying the number of shares outstanding by the current share price. The larger the market capitalization, the larger the influence the company has on the performance of the index.

Of the 500 companies, 10 stocks account for 31% of the entire $34.3 trillion in market capitalization. Among them are Microsoft Corp. (Nasdaq: MSFT), Amazon.com Inc. (Nasdaq: MSFT), Nvidia Corp. (Nasdaq: NVDA) and Tesla Inc. (Nasdaq: TSLA). Together, these 10 companies have returned over 20% this year, with the top five companies representing the overwhelming majority of the movement, according to CompaniesMarketCap.com.

This rally has been very narrow and concentrated. To further illustrate this point, the Invesco S&P 500 Equal Weight ETF tracks an equally weighted distribution of all companies in the S&P 500. It has only returned 3.3% this year through April 28.

Cash factors
The top 10 stocks driving the rally are also expensive when compared to the broader market as measured by the price-earnings ratio. First-quarter 2023 earnings reports have been decent, and the companies are well-capitalized to weather an economic slowdown – or perhaps they’re intentionally prepared for it.

Apple Inc. (Nasdaq: AAPL), which is the largest constituent in the S&P 500 at just over 7%, has $48 billion in cash. Berkshire Hathaway Inc. (NYSE: BRK.A), No. 5 on the list, sits heavy at nearly $129 billion in cash. Altogether, the top 10 companies are holding $687 billion in cash, based on the most recently available balance sheets.

Companies can do a few things with their cash. They can put it to work by acquiring other companies to grow the business. They can raise dividends or pay special dividends to shareholders. They can hold onto the cash to help weather an economic slowdown. Or they can buy back their own shares at lower levels relative to expected future values.

Questions remain
These trends raise several questions.

Given the relative underperformance this year of the bottom 490 stocks, is a recession already priced into those shares post the 2022 sell-off? Are investors seeking shelter in larger, well-capitalized companies ahead of a downturn? Is the market too optimistic, poised for growth or fairly valued?

No one knows all the answers to those questions. The best way to mitigate these risks and navigate the uncertainty is to maintain a properly diversified portfolio that’s aligned with your long-term goals and have the discipline to stay the course.

Andy Drennen is a certified financial planner and senior portfolio manager at Simmons Private Wealth in Springfield. He can be reached at andy.drennen@simmonsbank.com.