The Rise and Fall of Big Stocks: A Historical Perspective
Over the past decade, the largest companies in the S&P 500 have enjoyed consistent outperformance. However, research conducted by GMO’s asset allocation team, headed by Ben Inker and John Pease, suggests that this trend may not be sustainable in the long run. Historically, the top companies in the S&P 500 have struggled to maintain their market-beating performance over time.
According to data spanning from 1957 to 2023, Inker and Pease have observed a significant underperformance among the top 10 largest stocks in the year following their ranking. This indicates that “big is generally anything but beautiful” when it comes to stock performance, as highlighted in GMO’s first-quarter letter to clients.
The phenomenon of large stocks becoming the biggest by growing expensive has been a consistent factor in their underperformance. Inker and Pease noted that this anti-value bias has been costly, leading to poor relative returns for these companies. Since 1957, the top 10 stocks in the S&P 500 have lagged behind an equal-weighted index of the remaining 490 stocks by an average of 2.4% annually.
The Growing Concentration in the S&P 500
GMO’s analysis reveals a concerning trend of increasing concentration within the S&P 500 index. Founded in 1977 by renowned investor Jeremy Grantham, the firm has been a vocal critic of market bubbles. The top seven companies in the S&P 500 now account for 28% of the index’s total weight, doubling from their 13% share a decade ago.
This rise in concentration has been fueled by the exceptional performance of the so-called “Magnificent Seven” – a group of mega-cap technology companies like Apple Inc. and Microsoft Corp. These tech giants have significantly outpaced the average stock in the U.S. equities market, driving the index’s increasing reliance on their performance.
Top Tech Stocks Dominate Market Trends
In the ever-evolving world of investments, tech giants like Microsoft, Google, Amazon, Nvidia, Meta Platforms, and Tesla have captured the attention of investors with their remarkable performance in 2023.
A recent report from GMO highlights the significance of these companies, stating that biasing portfolios towards these tech behemoths has been immensely profitable. These tech giants, dubbed the “Magnificent Seven,” have outperformed the S&P 500 by a staggering 60% in 2023 alone.
Fueling the surge of the S&P 500 index, FactSet data shows a noteworthy 24.2% climb in 2023 propelled by the impressive gains of Big Tech companies. The index even briefly surpassed the historic 5,000 mark, signifying a monumental milestone for the market.
Inker and Pease, in their analysis, underscore the exceptional outperformance of mega-cap tech stocks over the past decade, with the exception of 2022 being the only year where they faltered relative to the market.
As the dominance of these tech giants continues to reshape market dynamics, investors remain captivated by the rapid growth and innovation exhibited by companies like Microsoft, Google, Amazon, Nvidia, Meta Platforms, and Tesla. With their strong foothold in the market, these tech titans are undoubtedly at the forefront of driving investment trends and shaping the future of the industry.The Beauty of Small Stocks: An Unprecedented Rise in Performance
In the realm of investment, size doesn’t always matter. While big stocks often get the spotlight, it’s the small ones that are currently stealing the show. According to GMO, small stocks are outperforming in a way that was once unimaginable, reaching record highs and defying expectations.
The trend of small stocks outperforming their larger counterparts is a significant shift in the market. Historically, big stocks have been seen as the safer, more stable option for investors. However, recent data shows that small stocks are not only keeping pace but surpassing expectations with their performance.
Small stocks have been on a winning streak, climbing to record highs and showcasing their potential for growth. This surge in performance has caught the attention of investors who are now reevaluating their investment strategies to capitalize on this emerging trend.
A New Perspective on Investing
In light of the remarkable outperformance of small stocks, investors are being urged to reconsider their investment approach. While big stocks have long been seen as the standard choice, the current market landscape suggests that small stocks may offer a unique opportunity for growth and profitability.
Seizing the Opportunity
As small stocks continue to outperform, investors are presented with a chance to diversify their portfolios and potentially achieve higher returns. By exploring the potential of small stocks and incorporating them into their investment strategy, investors can take advantage of this unprecedented trend in the market.
Embracing the Shift
The rise of small stocks to record highs represents a significant shift in the investment landscape. By recognizing and embracing this change, investors can position themselves for success in a market that is constantly evolving. Whether it’s through individual stock picks or diversified funds, small stocks offer a promising avenue for investors looking to maximize their returns.
In conclusion, the current trend of small stocks outperforming big stocks is a testament to the evolving nature of the market. By acknowledging this shift and adjusting investment strategies accordingly, investors can capitalize on the potential for growth and profitability that small stocks offer.