Year to Date Market Returns and Thoughts

2023.05.17, Jeffrey L. Stock, CFA, MBA

YTD the S&P 500 is up over 8%.  There are a few things surprising about that number.

The first is that only 6 companies could account for the entirety of the gain in the S&P 500.  Without those, the S&P would potentially be slightly negative on the year.  Those companies are:



I am concerned that the majority of change in the share price of these companies has come from multiple expansion rather than actual EPS or Sales growth.  I think lower 10 year treasury yields have driven the expansion in multiples (Price to Sales or P/S and Price To Earnings or P/E).

 

The full impact of the largest capitalization returns is seen looking at the S&P 500 Capitalization Weighted (the standard) vs. Equal Weighted (where each company receives and equal weighting):

What is also interesting is that PE expansion (contraction) has contributed most to major index returns for 2022 and 2023.  Below is a table that shows where changes in EPS (Earnings per Share) and PER (Price to Earnings Ratio) result in TR (Total Return).  It is clear that Change in PER (the Price to Earnings Ratio) has contributed dramatically and the primary driver.

Many people also do not realize the level of concentration in the S&P 500 among the largest stocks.  As of today, the top 2 holdings account for 14% of the index and top 5 account for over 20% (This comes from the ishares ETF IVV as of 5/16/2023).

I think there are a few important points to consider in this data:

  1. Just a handful of stocks, which I think are very expensive, have driven the YTD returns in the stock market.

  2. Much of the change in the index levels has been driven by expansion in Multiples rather than authentic Sales and Income Growth.  I think this comes from falling long term yields in treasury markets.

  3. Should there be any credit events or if long term treasury yields float higher, I fear these multiples will contract similar to 2022.

 

Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  Indexes are unmanaged and do not incur management fees, costs, or expenses.  It is not possible to invest directly in an index. 

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All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  All economic and performance data is historical and not indicative of future results.  All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.