Year-to-date the Magnificent 7 Index Performance, and More!
Hello and welcome to today’s StreetSmarts video. My name is Brian Lester and I am the Chief Investment Officer at Howe & Rusling. Today I will be talking about the composition of stock market returns in 2023, the performance contribution of the so-called Magnificent 7 stocks, as well the poor performance of dividend paying stocks.
While there are thousands of stocks that trade on U.S. stock exchanges, when people talk about “the stock market” they are usually referring to a stock market index, such as the S&P 500, which many investment products are benchmarked to. The S&P 500 index contains about 500 stocks, each of which are weighted according to their market value. For example, Apple has the largest weight in the S&P 500 index at just over 7%.
Year-to-date through October 12, the total return of the S&P 500 index is a very strong 14.8%.
Another way to look at the U.S. stock market is by using an equal weighted index, such as the S&P 500 equal weight index. In this index, each of the 500 stocks in the S&P 500 are weighted the same, or 0.2%.
Year-to-date through October 12, the total return of the S&P 500 equal weight index is less than 1%.
Why is there such a difference?
In 2023, excitement around the development of artificial intelligence has propelled a small handful of the very largest technology stocks to incredible returns. In fact, the concentration of total market returns in this handful of stocks has become so remarkable, the media created a label for them: The Magnificent 7. Stocks in the Magnificent 7 include Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia and Tesla. Bloomberg, an investment software program commonly used by investors, created an index to help investors track and analyze their incredible performance: The Magnificent 7 Index.
Year-to-date, the Magnificent 7 index has returned 94% and accounted for 87% of the appreciation of the S&P 500 index.
Is this unusual? Very, especially if 2023 was the beginning of a new bull market after the more than 20% decline in the S&P 500 in 2022. I’d like to further describe what makes this so unusual.
One reason for the Magnificent 7’s enormous contribution to the S&P 500’s total return in 2023 is the currently exceptionally high index concentration. High index concentration in a small number of investors’ favorite stocks is quite common late in an economic cycle. However, the S&P 500 has never been as concentrated as it is now. Nearly 30% of the S&P 500 index is comprised of the Magnificent 7 stocks. The top 10 stocks in the S&P 500 account for 1/3 of the index.
Not only is the degree of market concentration unprecedented, but data back to the 1950s shows that small cap stocks, not mega caps, have nearly always led the market during the first year of a new bull market. In 2023, not only are small cap stocks not leading, but they are also down YTD. That has never happened.
Another unique feature of the stock market in 2023 is the terrible performance of dividend paying stocks, especially compared to stocks that pay no dividend.
Through October 12, weighted by market value, stocks in the S&P 500 that pay no dividend are up about 46% and stocks with at least a 2% dividend yield are down about 3%. Bonds, which compete with dividend paying stocks for investment dollars in search of yield, have become much more attractive as interest rates rose sharply in 2023. This, and investors’ desire for growth companies that might benefit from artificial intelligence, explains the poor performance of dividend paying stocks in 2023.
To contrast this with longer-term data, according to data and analysis by Bloomberg, Morningstar and Fidelity, dividends have accounted for 40% of stock market returns since 1930. According to research by Ned Davis, over the last 50 years, the total return of dividend paying stocks is more than 5 times the total return of stocks that paid no dividend. Stocks that grew their dividends produced a total return over that period of more than 10x the return of stocks that paid no dividend.
Our Equity Income strategy here at Howe & Rusling places a focus on dividend income growth.
We target a portfolio level dividend yield premium to the S&P 500 of at least 1%. When analyzing companies, we consider the dividend yield, growth in dividend payments, as well as the safety and sustainability of a company’s dividend payments. This analysis is in addition to research conducted on a company’s business fundamentals, strategic positioning, and valuation among other factors. After the highly unusual phenomenon in 2023 that we described today, we believe many dividend growth stocks are very attractive investments and we are excited about the prospects of our equity income investment strategy.
If you have any questions pertaining to today’s topic, please feel free to contact us and we would be delighted to discuss it further with you. Thank you for tuning into today’s StreetSmarts video presented by Howe & Rusling. Have a wonderful day.
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