by Kevin T. Cooper, CFA
VICE PRESIDENT | HEAD OF INVESTMENT RESEARCH
It’s common for individual investors to view the S&P 500 Index as the “total U.S. stock market,” but a look under the hood reveals some interesting observations.
Addressing a Popular Misconception
While the Index accounts for about 80% of the value of all publicly traded companies in the U.S., because the stocks that make up the Index are weighted by market capitalization, a small handful of mega-caps drive much of its performance (about 30%).
These companies are the MAAANM1 group of stocks—all of which have grown rapidly as a result of technological innovation and the digital economy. The consequent overrepresentation of these companies in the S&P 500 makes investing in the Index less of a diversification play and more of a bet on technology. As a result, investors in the Index may win when market circumstances favor the technology sector, but they also may lose big when those dynamics change (see chart).
Growth of $1M – MAAANM Stocks (12/31/14 – 5/31/22)
Data as of 5/31/2022. MAAANM refers to six stocks within the S&P 500® Index. Meta, Apple, Alphabet, Amazon, Netflix, and Microsoft. Past performance is no guarantee of future results.
What Clients Need to Know
Clients invested in funds that track the Index should know two things: First, as stated, the Index is not as diversified as they may think and therefore carries more risk than they might imagine. Second, a shift from a decades-long policy of monetary easing to rising interest rates has dramatically changed how the MAAANM stocks are now being valued. This re-valuation of the earning potential of tech-related growth stocks is what drove MAAANM shares down sharply this year (see chart). Until the current macroeconomic environment changes, the challenges facing technology-related growth stocks are likely to continue.
Decline of $1M – MAAANM Stocks – YTD
Data as of 5/31/2022. MAAANM refers to six stocks within the S&P 500® Index. Meta, Apple, Alphabet, Amazon, Netflix, and Microsoft. Past performance is no guarantee of future results.
Action Steps to Consider
In 2023, several stocks in the S&P 500 will be reclassified out of technology into other sectors.2 Though this may appear on the surface to help address the overrepresentation of technology within the Index, the Index’s composition will remain the same, as does the message to investors: Concentration within a portfolio—whether intentional or accidental—carries risk. Clients who have found themselves stung by the decline of the S&P 500 may want to consider a broader investment strategy that includes international stocks; value funds; small- and mid-cap stocks; alternative investments like private placements and real estate; and fixed income assets that are now offering higher yields.
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1MAAANM refers to Meta (formerly Facebook), Apple, Alphabet, Amazon, Netflix and Microsoft.
Diversification does not guarantee a profit or protect against a loss in declining markets. There can be no guarantee of safety of principal or a satisfactory rate of return.
Past performance is not a guarantee of future results. The views expressed are not intended as a forecast or guarantee of future results, and are subject to change without notice. Any sectors, industries, or securities discussed should not be perceived as investment recommendations. There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for a long term, especially during periods of downturns in the market.
The S&P 500® Index is a capitalization-weighted index of 500 stocks. The S&P 500 Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Russell 1000® Growth Index is a market capitalization weighted index that measures the performance of those Russell 1000® companies with higher price-to-book ratios and higher forecasted growth values.
The MSCI ACWI (All Country World Index) ex-USA is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI All Country World ex-USA Index consists of 22 developed and 24 emerging market country indices. Please go to msci.com for most current list of countries represented by the index.
Investments in international securities are subject to certain risks of overseas investing including currency fluctuations and changes in political and economic conditions, which could result in significant market fluctuations. These risks are magnified in emerging markets.
Investments in value stocks may perform differently from the market as a whole and may be undervalued by the market for a long period of time.
Investments in mid-capitalization companies are subject to certain risks such as greater price volatility, lower trading volume, and less liquidity than the stocks of larger, more established companies.
Investments in small-capitalization companies are subject to certain risks such as erratic earnings patterns, competitive conditions, limited earnings history and a reliance on one or a limited number of products.
In general, alternative investments such as private equity or real estate involve a high degree of risk, including potential loss of principal invested. These investments can be highly illiquid, charge higher fees than other investments, and typically do not grow at an even rate of return and may decline in value.
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