S&P 500 Bull Market Kicks Off, But The Dominance Of 7 Stocks Leaves S&P 493 In The Dust

The S&P 500 index, represented by the SPDR S&P 500 ETF Trust SPY, officially entered a bull market on June 8, surging more than 20% since its October 2022 lows.

The S&P 493 index, which excludes the performance of only seven of the 500 largest U.S. stocks, remains nearly unchanged in 2023.

Apple Inc. AAPL, Microsoft Corp. MSFT, Alphabet Inc. GOOG GOOGL, Amazon.com, Inc. AMZN, Meta Platforms Inc. META, NVIDIA Corp. NVDA and Tesla, Inc. TSLA are the dominant seven stocks shaping the market landscape in 2023, and the following data will shed light on the reasons behind their influence.

Chart: 7 Most Capitalized U.S. Stocks vs. S&P 500 vs. S&P 500 Equal Weight

Astounding Outperformance: An exclusive index, consisting solely of the seven stocks mentioned above, has skyrocketed by 83% year-to-date, in stark contrast to the 13% gain in SPY and the mere 3% increase in the Invesco S&P 500 Equal Weight ETF RSP.

Remarkable Weight Concentration: Twenty-six percent of the S&P 500 index is represented by these seven companies. Their combined market cap reaches $10.6 trillion compared to the $27 trillion of the other 493 stocks.

Elevated Valuations: The seven S&P heavyweights are significantly overvalued in comparison to the rest of the market. While they trade at an average forward price-to-earnings (P/E) ratio of 40, the S&P 500 index’s remaining 493 stocks trade at an average forward P/E ratio of 17.

Differing Upside Prospects: The seven tech giants currently screen a 5% price upside potential to Wall Street analysts’ current median price target, with Tesla trading 15% higher and NVIDIA trading 17% lower. The remaining 493 companies, on the other hand, have a 13% potential upside to the analysts’ median price targets. Notably, Moderna Inc. MRNA is the S&P 500 stock with the highest gap to the median price target, which is 65% higher than current market prices.

Factors Contributing to These 7 Stocks’ Market Dominance

• Artificial Intelligence (AI): The adoption of AI has played a critical role in fueling the remarkable growth of these prominent tech stocks, positioning them at the forefront of the technological revolution.
• End of Federal Reserve Policy Tightening: Stocks with higher valuations stand to benefit from market expectations that interest rate hikes will eventually end, creating a favorable environment for these companies.
• Concentration in Exchange-Traded Funds (ETFs): Because these stocks are heavily weighted in major capitalization-based indices, they receive a disproportionate share of ETF inflows compared to the broader market, amplifying their influence and market dominance.

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