July 10, 2023

For as great as the market rally has been in 2023, it’s been awfully narrow in terms of leadership.

Most of the gains have come from mega-cap technology favorites, which returned 32.3% through the end of May. There was also a big assist from the communication sector, which was up 30.1% in that time.

What’s really driven markets recently has been dubbed the “Magnificent Seven” by some analysts. That group includes Apple, Microsoft, Alphabet (or Google), Amazon, NVIDIA, Meta (formerly Facebook), and Tesla. # This collective is up a stunning 70% as of this writing and accounts for nearly all of the S&P 500’s gains in 2023.

When a handful of huge companies account for the vast majority of the market’s gains, it’s the very definition of narrow market breadth. While those stocks have been superstars, the remaining stocks in the S&P 500 are up just 0.1%.

The S&P 500 is a cap-weighted index, meaning that individual companies within the index are included in amounts corresponding to their total market capitalization. Currently, huge companies like Apple and Microsoft make up 6.6% and 5.6% of the S&P 500, respectively, and their good performance has lifted the entire index.

There are also indexes that weigh each company equally. They have not done as well as the S&P 500 this year. For instance, as of this writing the S&P 500 is up 9.7% while the Invesco S&P 500 Equal Weight ETF (RSP)*, which weighs each S&P 500 company equally, has returned -0.7%.

This disparity is rarely so large and it has everything to do with the dominance of a handful of huge tech stocks.

# Neither clients of Dan White and Associates nor Dan White personally own shares of Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta, or Tesla.

* Neither clients of Dan White and Associates nor Dan White personally own shares of RSP.