Nvidia And Its Trillion-Dollar Pals Drove Most Of S&P 500’s May Gains
Topline
The S&P 500 just stormed ahead to 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 slower pace.
The six trillion-dollar tech companies constituted three-quarters of the S&P 500’s gains this month.
Key Facts
The S&P’s near 4% gain last month marked its best May since 2009 and second-best May of the last 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 market capitalization for its 500 members and is thus skewed toward larger companies, outperformed the equal-weighted S&P 500, 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, extending the gap between the normal S&P (up 10% year-to-date including dividends, 39% dating back to the beginning of last year) and its equal-weighted counterpart (4%, 19%).
Predictably, it’s the biggest stocks that drove the S&P 500’s rally, as Microsoft, Apple, Nvidia, Alphabet, Amazon and Meta, the six West Coast technology leaders who are the only American firms valued at over $1 trillion, tacked on a whopping $1.3 trillion in market cap this month, accounting for a ludicrous 76% of the index’s total gains.
That sextet, which constitute six of the infamous “magnificent seven” before the term fell out of favor when the seventh member Tesla’s lagging returns and profits made it the odd man out, has accounted for 40% of the S&P’s market value gained this year, an understated proportion as the S&P swapped out lower market cap Whirlpool and Zions Bancorp for Super Micro Computer and Deckers in March.
That pushes its weighting on the index from 28% at the beginning of the year to 30%, as the S&P inched toward its most top-heavy level since the Great Recession, according to Bank of America research tracking the discrepancy between the market cap-weighted S&P and its equal-weighted cousin.
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Tangent
Last year and the first five months of 2024 have been a great stretch for most long investors in American equities, but those most exposed to mega-cap tech have the fullest bellies. If you invested $1,000 in each of the stocks of Microsoft, Apple, Nvidia, Alphabet, Amazon and Meta at the beginning of last year, you’d now have about $18,500. A $6,000 investment in the S&P 500 at the start of last year would leave you with just below $8,400, and a $6,000 investment in the equal-weighted S&P would now be worth around $7,100, evidence of the uneven returns offered amid the latest stock market surge.
Contra
It’s easy to forget during boom times, but arguably the strongest appeal of investing in exchange-traded funds (ETFs) tracking broad indexes like the S&P 500 is not to match the top-performing stocks, but to safeguard against losses during down periods. It may be hard to remember, but we’re just 17 months removed from the stock market’s worst year since 2008, as the S&P 500 declined 19%, the equal-weighted S&P fell 13% and the Dow Jones Industrial Average fell 9% in 2022. Those indexes all posted better returns that year than each of the aforementioned six tech titans, whose losses ranged from Apple’s 26% to Meta’s 64%.
Key Background
The stock market recovery over the last year-and-a-half broadly came as investors scrapped expectations for an extended 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 bring higher profits thanks to lower corporate borrowing costs. The reason tech stocks benefited even more intensely from the improved sentiments is because of everyone’s favorite buzz words: Artificial intelligence. The super six trillion-dollar tech companies became highly attractive for their potential to turn the AI hype into future earnings potential. Nvidia, which designs more than three-quarters of the semiconductor chips powering generative AI technology, is the clearest example of what the AI boom can mean for earnings, as it just reported a sevenfold increase in profits thanks to the high corporate demand for its products.
Surprising Fact
The S&P’s strong returns this month bucks the well-known adage, “sell in May and go away,” referring to the historical notion that stocks to underperform in the summer months before roaring back in the fall and winter.
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