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Will tech stocks continue to lead the market?

Anthony Saglimbene, Chief Market Strategist – Ameriprise Financial
Justin Burgin, Vice President of Equity Research – Ameriprise Financial
Sept. 18, 2023

The companies with the highest market capitalizations, including many tech stocks, continue to drive most of the S&P 500 Index returns this year, widening the performance gap between large-cap and small-cap stocks.

Here’s what’s driving this outperformance among the large-cap stocks, and our view on whether the trend will continue through the end of the year:

AI fuels a rise in large-cap valuations

Investor enthusiasm for artificial intelligence (AI) turned several large-cap technology companies into even larger-cap technology stocks over the course of 2023. In fact, eight of the 10 largest companies in the S&P 500 Index by market capitalization (the number of shares outstanding multiplied by stock price) are considered beneficiaries of the longer-term AI growth story.

Data through the end of August shows the dramatic impact these top 10 companies have had on overall stock market performance. Specifically, the S&P 500 Index (which is a market-capitalization weighted index) generated a total return of +18.7% from the start of 2023. However, excluding the 10 largest stocks, the return calculation drops to just +4.2%. 

Higher stock prices typically yield higher valuations as investors try to estimate the impact of future growth potential. And with much of the growth potential for AI expected in future years, the price-to-earnings (P/E) multiples for the largest companies in the S&P 500 Index have moved higher. 

In the chart below, we expanded the universe to include the top 50 companies in the S&P 500 Index to help show the dramatic rise in valuation metrics. As shown, the largest 50 companies in the S&P 500 have a median P/E of almost 31x. However, the remaining ~450 companies in the Index have a substantially lower P/E multiple of just under 22x. For reference, the 5-year median P/E for the S&P 500 is approximately 21x.   

Median P/Es is calculated by excluding companies with negative earnings.
Data as of Aug. 31, 2023
Data sources: FactSet, American Enterprise Investment Services Inc.
These figures are shown for illustrative purposes only. 

Interest rate uncertainty could weigh on the market

While the top 10 companies drove most of the S&P 500 Index returns in the first half of 2023, the market broadened out in July to include a wider set of sectors and stocks that had been left behind. For example, in July, energy, financials and U.S. small-cap stocks outperformed the S&P 500.  

However, stock trends in August quickly turned less favorable as the backup in interest rates and subtly changing views on how much higher the Federal Reserve will need to raise the Fed funds target rate weighed on sentiment. Notably, a batch of stronger-than-expected economic data last month fueled the idea that good news on the economy may mean bad news for stocks. However, weaker-than-expected economic releases on the job front in late August and lower interest rates helped mitigate stock losses for the month.  

That said, the outlooks on long-duration assets (such as stocks) dimmed slightly compared to earlier in the year. Simply, as rates remain elevated, the present value of a company’s future profits become less valuable when discounted back to the present. Unsurprisingly, areas of the market focused on growth (e.g., some of the largest 50 stocks in the S&P 500), technology and small-caps experienced outsized selling pressure in early August compared to value as well as the broader S&P 500. Valuations in these select areas are more closely tied to their profit “potential”; hence, their sensitivity to rates has led to increased stock volatility in the third quarter.

Historical headwinds in the fall will likely challenge all stocks in the short term

September is a historically weak month for stocks — it’s one of only two months in which the S&P 500 averages a negative return over the last 20 years. Further, the rolling four-week average of daily volatility in the S&P 500 tends to increase steadily through early November, according to Bespoke Investment Group.

This uptick in stock volatility in September and early October makes sense from a calendar perspective: Traders are through their summer vacations, the holidays are still out in the distance and the year starts to shorten quickly for professional money managers as targets and return performance for year-end bonuses approach.

As the chart below shows, broad market volatility in 2023 seems to follow the seasonal pattern of lows reached in the early summer, followed by rising volatility heading into September.  

Data as of Aug. 31, 2023
Data sources: Bloomberg
These figures are shown for illustrative purposes only.

However, longer-term investors should take this information in stride. For all the ups and downs in the market over recent years, the S&P 500 is higher by over 18% YTD on a total return basis through the end of August, up nearly +1.5% over the last two years (that includes 2022’s 18% decline) and is higher by +10.5% annualized over the previous three years, according to Morningstar data. The ability to look through a bit of volatility, as well as the brief periods of downdrafts that occur in the market, tends to reward the patient investor.

Bottom line: Will large-cap outperformance continue?

With economic activity moderating and returning closer to longer-term averages this year, we believe investors will likely continue to seek out companies with strong secular drivers and outsized potential for profit growth. For example, while the top 50 stocks are expensive from a valuation perspective, these companies also tend to be the secular drivers of the U.S. economy. Thus, balancing a portfolio with a mix of growth and value stocks can help keep investors participating when high P/E equities are moving higher. It can also help mitigate risk when volatility arises or when value stocks attract more attention.


Position your portfolio for the long term

Regardless of how the broader market trends over the very near term, a slightly defensive but generally balanced portfolio continues to be a prudent approach. Reach out to your Ameriprise financial advisor if you have questions on how your portfolio is positioned. 


Sources: Unless otherwise noted, financial data is from FactSet and Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.


The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. 


Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources.  This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. There is no guarantee that investment objectives will be achieved or that any particular investment will be profitable.


The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor. 


Growth securities, at times, may not perform as well as value securities or the stock market in general and may be out of favor with investors.


A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund’s income and yield. These risks may be heightened for longer maturity and duration securities.


Generally, large-cap companies are more mature and have limited growth potential compared to smaller companies.  In addition, large companies may not be able to adapt as easily to changing market conditions, potentially resulting in lower overall performance compared to the broader securities markets during different market cycles.


The fund may invest significantly in issuers within a particular sector, which may be negatively affected by market, economic or other conditions, making the fund more vulnerable to unfavorable developments in the sector.


Investments in small-cap companies involve risks, including volatility, that are greater than investments in larger, more established companies.


Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies.Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.


The products of technology companies may be subject to severe competition and rapid obsolescence, and their stocks may be subject to greater price fluctuations.


Value securities may be unprofitable if the market fails to recognize their intrinsic worth or the portfolio manager misgauged that worth.


Past performance is not a guarantee of future results.


An index is a statistical composite that is not managed. It is not possible to invest directly in an index. 


The S&P 500 Index is a basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value (shares outstanding times share price), and its performance is thought to be representative of the stock market as a whole. The S&P 500 index was created in 1957 although it has been extrapolated backwards to several decades earlier for performance comparison purposes. This index provides a broad snapshot of the overall US equity market. Over 70% of all US equity value is tracked by the S&P 500. Inclusion in the index is determined by Standard & Poor’s and is based upon their market size, liquidity, and sector. 


The Chicago Board of Options Exchange (CBOE) Volatility Index® (VIX®) Index is based on real-time prices of options on the S&P 500® Index (SPX) and is designed to reflect investors’ consensus view of future (30-day) expected stock market volatility. 


Price/Earnings (P/E) is an equity valuation multiple calculated by dividing the market share price, as of a certain date, by earnings per share. Trailing P/E uses the share price divided by the past four-quarters’ earnings per share. Forward P/E uses the share price as of a certain date divided by the consensus estimate of the future four-quarters’ EPS.


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