The S&P 500 index reached the significant threshold of 5,000 points just moments before the close of trading on Thursday, Feb. 8, extending its run to new all-time highs. Yet with this remarkable surge in the market-cap weighted index, there are cautionary signals when comparing the index to its equal-weight counterpart.
Over the last year, the performance of the S&P 500 index, tracked by the SPDR S&P 500 ETF Trust SPY, has surged by 21%.
In stark contrast, the Invesco S&P 500 Equal Weight ETF RSP has only seen a 4% return in the same period, significantly trailing its cap-weighted counterpart.
The relative ratio between the two indices has reached levels not seen since September 2020. The forward price-to-earnings ratio for the cap-weighted index stands at 21, making it 24% more expensive than the valuation of the equal-weight index.
The concentration of weight in the Magnificent Seven within the S&P 500 Index plays a crucial role in explaining the stark 17-percentage-point difference in performance over the last year between the two indices.
The combined weight of Apple Inc. AAPL, Microsoft Corp. MSFT, Alphabet Inc. GOOG GOOGL, Amazon Inc. AMZN, Meta Platforms Inc. META, NVIDIA Corp. NVDA and Tesla, Inc. TSLA in the cap-weighted S&P 500 has surged to 29.3% of the overall index.
Together, these seven stocks have soared by nearly 80% over the last year. Remarkably, these heavyweights alone have contributed 64% of the S&P 500’s returns during the same period.
S&P 500 Performance Contributions Over The Last Year
| Company | Weight | Return | Contribution |
|---|---|---|---|
| Microsoft Corporation | 7.24% | 56.64% | +3.25 pp |
| Apple Inc. | 6.65% | 24.68% | +1.64 pp |
| NVIDIA Corporation | 4.05% | 213.76% | +3.43 pp |
| Amazon.com, Inc. | 3.70% | 69.81% | +1.89 pp |
| Meta Platforms, Inc. | 2.42% | 156.28% | +1.84 pp |
| Alphabet Inc. (Class A) | 2.05% | 46.88% | +0.81 pp |
| Alphabet Inc. (Class C) | 1.74% | 47.26% | +0.69 pp |
| Berkshire Hathaway Inc. BRK | 1.72% | 28.85% | +0.48 pp |
| Eli Lilly and Company LLY | 1.35% | 117.94% | +0.91 pp |
| Broadcom Inc. AVGO | 1.29% | 116.71% | +0.86 pp |
| Tesla, Inc. | 1.23% | -5.84% | -0.09 pp |
| Security Name | Weight | Average Return | Total Contribution |
|---|---|---|---|
| Magnificent Seven | 29.14% | 77% | +12.08 pp |
Despite their combined weight amounting to approximately 1.5% in the equal-weighted index, their overall performance contribution doesn’t even reach 1 percentage point.
As the S&P 500 index celebrates its monumental leap to the 5,000-point milestone, investors and market observers are prompted to look beyond the surface of these record-breaking numbers.
Read also: Muddy Waters Shorts Fairfax Financial Holdings: ‘Not The Berkshire Hathaway Of Canada’
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