By Daniel McGarvey, CFA on behalf of Stonebridge Financial Group advisors
The market turmoil of recent months has had an outsized impact on the largest companies at the top of the market, particularly those referred to as the “Magnificent 7” – Apple, Amazon, Google, Meta, Microsoft, Nvidia, and Tesla. These high-flying names have been the primary drivers of market returns in recent years, outperforming the average stock to such an extent that market-cap weighted indices developed serious concentration risk. A testament to this lack of breadth is the remarkable fact that, even though the S&P has had a total cumulative return of 107% over the last 5 years, more than half of its constituents are still trading below the highs they reached in 2021. And, as shown below, the Magnificent 7 have accounted for over half of the market’s share of returns, both positive and negative, for several years.
Source: J.P.Morgan Asset Management
The market’s concentration issue has not improved significantly with the recent downturn. The ten largest stocks still make up about 35% of the S&P 500, and, as shown below, their combined market capitalization amounts to nearly two thirds the size of U.S. GDP (Gross Domestic Product). From a valuation perspective, their weighted PE (Price-to-Earnings) multiple of 26 is still notably higher than the 17.8 multiple of the remaining S&P 500 stocks. Admittedly, the large valuation gap has persisted for years, but we believe the current administration’s policies could continue to steer us away from the “easy money” era of loose policy, quantitative easing, and free global trade that put fundamental valuation in the back seat for so long.
Source: Strategas Research Partners LLC
We are not by any means suggesting to bet against the market’s largest stocks, as they are mostly very sound, well-managed companies whose premium price tags have been backed by premium earnings growth. We do believe, however, that it is unsustainable for them to keep dominating the market to this extent, and their earnings growth advantage has been narrowing. There are plenty of high quality stocks further down the capitalization spectrum that have room to outperform if markets begin to reward fundamentals again. Many of these well-established value-leaning companies can also mitigate downside in turbulent times, as has been the case so far this year.
The S&P 500 fell about 10% at the beginning of April, but it mostly made up that ground in the following weeks and ended up returning -0.7% for the month. Markets continue to wrestle with the implications of tariff policy, and corporate earnings have been resilient despite -0.3% real GDP growth for the first quarter. The Bloomberg US Aggregate Bond Index gained 0.4% with the 10-Year Treasury Rate trading in a wide range before finishing the month at 4.17%.
Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.
May 2025 Commentary: The Average Stock vs. The Market
By Daniel McGarvey, CFA on behalf of Stonebridge Financial Group advisors
The market turmoil of recent months has had an outsized impact on the largest companies at the top of the market, particularly those referred to as the “Magnificent 7” – Apple, Amazon, Google, Meta, Microsoft, Nvidia, and Tesla. These high-flying names have been the primary drivers of market returns in recent years, outperforming the average stock to such an extent that market-cap weighted indices developed serious concentration risk. A testament to this lack of breadth is the remarkable fact that, even though the S&P has had a total cumulative return of 107% over the last 5 years, more than half of its constituents are still trading below the highs they reached in 2021. And, as shown below, the Magnificent 7 have accounted for over half of the market’s share of returns, both positive and negative, for several years.
Source: J.P.Morgan Asset Management
The market’s concentration issue has not improved significantly with the recent downturn. The ten largest stocks still make up about 35% of the S&P 500, and, as shown below, their combined market capitalization amounts to nearly two thirds the size of U.S. GDP (Gross Domestic Product). From a valuation perspective, their weighted PE (Price-to-Earnings) multiple of 26 is still notably higher than the 17.8 multiple of the remaining S&P 500 stocks. Admittedly, the large valuation gap has persisted for years, but we believe the current administration’s policies could continue to steer us away from the “easy money” era of loose policy, quantitative easing, and free global trade that put fundamental valuation in the back seat for so long.
Source: Strategas Research Partners LLC
We are not by any means suggesting to bet against the market’s largest stocks, as they are mostly very sound, well-managed companies whose premium price tags have been backed by premium earnings growth. We do believe, however, that it is unsustainable for them to keep dominating the market to this extent, and their earnings growth advantage has been narrowing. There are plenty of high quality stocks further down the capitalization spectrum that have room to outperform if markets begin to reward fundamentals again. Many of these well-established value-leaning companies can also mitigate downside in turbulent times, as has been the case so far this year.
The S&P 500 fell about 10% at the beginning of April, but it mostly made up that ground in the following weeks and ended up returning -0.7% for the month. Markets continue to wrestle with the implications of tariff policy, and corporate earnings have been resilient despite -0.3% real GDP growth for the first quarter. The Bloomberg US Aggregate Bond Index gained 0.4% with the 10-Year Treasury Rate trading in a wide range before finishing the month at 4.17%.
Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.
Stonebridge Financial Group
Get Expert Financial Guidance Now.
Ready to take control of your financial future? Contact Stonebridge Financial Group today for a personalized consultation. Let us help you navigate complex financial decisions and build a secure path to your goals.