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Hi, I’m Ryan McGuire, Senior Consult with Oak Wealth Advisors. This is our May 2023 market update. As you can see, it was somewhat of a disappointing month for most asset classes.
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The S&P 500 led the way, barely positive at 0.4%. Remaining stock asset classes fell around 1-4%. Bonds due to a small bounce back in interest rates fell around 1%.
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But when it comes to the U.S. Market rates, these numbers only tell a part of the story. The rise in the size of the five largest U.S.
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Companies having a major performance impact on the stock market indexes that include them. The group includes Apple, Microsoft, Alphabet known as Google, Amazon, and Nvidia.
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At the end of May, these companies comprised almost a quarter of the total market capitalization of the S&P 500 index.
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This is the highest concentration of the five largest stocks in the history of the index. Apple and Microsoft alone were almost 15%.
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Therefore, the performance of these stocks has an outsized impact on investors who invest in virtually every index that includes large U.S.
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Companies and uses market weightings to determine composition. While these technology stocks are having a great year, in 2022, they all suffered large declines due to the negative impact rising interest rates had on growth companies.
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In short, the heavy concentration of these companies in the indexes typically leads to greater volatility than other investments experienced that don’t have the same market weighted exposure to these stocks.
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At Oak Wealth Advisors, we keep our faith in the investment science, which validates that broad investment diversification delivers long-term investment success, and with less volatility.
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Most investors who apply this approach outperform the market in 2022. As we approach the end of the second quarter of 2023, the five largest U.S.
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Companies have high valuations. Currently, their stock prices reflect investors paying anywhere from $28 for every dollar of earnings generated by Google, to over $290 for every dollar of earnings generated by Amazon.
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Over the past 25 years, the S&P 500 has been priced on average at under $17 for every dollar of earnings.
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Given that U.S. Market leadership changes over time, we would expect the five biggest stocks to underperform the overall market at some point.
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These companies currently have high valuations, which will require exceptional growth and execution of their businesses to overperform the overall market at some point.
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The largest seven companies in the S&P 500 in 1980 were all either automobile manufacturers or oil companies. By 2000, only one of the five oil companies was still in the top seven.
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That was Exxon. And there was better diversification amongst the seven largest companies. The biggest technology companies have been at the top since 2013.
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Nvidia and Amazon joined them more recently, while GE Johnson & Johnson awarded $1.5 billion in sales. Walmart have all slipped from the top of the list.
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Technologies will continue to play an important part in the world economy. However, it is important to have perspective when evaluating how much to pay for anything, including stocks.
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We will continue to invest for long-term appreciation by incorporating diversification with a desire for reasonable valuations. Thanks for tuning in.
