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When does the equity market no longer represent the full economy?

Many investors and economists often refer to the stock market as a leading indicator for the economy, as equity market participants should be discounting the impact of future positive and negative events into the current price of stocks.  Those same investors and economists are often referring to the S&P 500 when they refer to the equity market.  The S&P 500 is a market cap-weighted index, meaning that the size of each position in the index is determined by the price of the stock multiplied by the number of shares outstanding.  This implies that as companies become larger in terms of market cap, they represent a larger share of the overall index and have a larger influence on the performance of the overall index.  If the index becomes too concentrated, with very large market cap names, the performance of the index will be linked to the performance of a small number of companies.  This could create a misleading signal as to the overall health of the economy and companies since they are underrepresented in a market cap weighted index. The current composition of the S&P 500 index could possibly be described  as creating one of these misleading signals. 

As of July 6th, the top 3, top 5, and top 15 stocks are the same size as the bottom 300, 350, and 420 stocks in the S&P 500.  This means that a small number of very large stocks are driving much of the performance of the index and their respective industry groups. 

Source: Cornerstone Macro.
Source: Cornerstone Macro.

The S&P 500 index was down ­-3% in 2020 as of July 2nd.  By looking at the performance of the components of the index, we get a better understanding of how various parts of the index are faring.  Looking at the index by market cap decile (top 50 stocks, 50-100, 100-150…), we can see that the only group with positive performance in 2020 are the largest 50 companies.  The median performance of the 50 largest stocks was +2.4% while the median return for all stocks in the index was -11%.  The lowest median returns were in the smallest 150 stock group. 

Source: Y Charts.
Source: Y Charts.

Within that top 50 decile, there are six companies (Facebook, Amazon, Netflix, Microsoft, Apple, and Google, which are labeled FANMAG by Ned Davis Research) that epitomize the performance divergence of the largest companies compared to the rest of the market.  Through July 6th, the FANMAG group has returned +33% in 2020, while the performance of the other stocks in the S&P 500 was -8.55%.  The overall S&P 500 index return over the same period is -1.60%.    

FANMAG Returns YTD.png

Looking at industry performance, these mega sized companies make up an even larger percentage of these groups and contribute even more to the overall performance. 

Ned Davis Research tracks 23 industry groups in their multi-cap universe.  Through July 6th, only nine of them had a return above the S&P 500 index in 2020.  Many of the best performing industry groups have significant concentration in single stocks that are driving much of the performance.  Tesla is 70% of the Auto and Components, Amazon is 57% of Retail, Microsoft is 37% of Software and Services, Apple is 76% of Tech Hardware, and Google, Facebook, and Netflix combine for 68% of the Media and Entertainment industry. 

Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at . For data vendor disclaimers refer to .
Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at For data vendor disclaimers refer to

The S&P 500 can still be an acceptable investment vehicle for investors and can still have merit in terms of accessing a portion of the U.S. equity market.  However, based on the current concentration and performance differences, it is becoming less useful as a proxy for how the overall economy is performing or the likely near-term trajectory.   What used to be a broad-based index is starting to become more of a basket of mega-cap stocks that no longer represents how various portions of the U.S. economy are performing.   


The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.


Vice President, Research and Strategy
Boyd Watterson Asset Management, LLC