You have probably heard over and over in 2024 that the U.S. market is just too concentrated in just a few of the largest U.S. stocks by market capitalization. Oggonomics has echoed this thought. The only problem in making this case is that it has continued to come with an underperformance. Is it now time for a change?
The S&P 500 is more or less at all-time highs. There have been many calls to diversify away from just owning the top tech giants. That said, that’s what has been working — and the companies feeding off their growth. Now is a time that strategic investors should be deciding if they want to stick in the mega-caps or spread the money around into a wider universe.
With 5 of the tech giants set to report this week, and perhaps to offer guidance into Q4-2024 and perhaps even 2025, this could very well be a pivotal moment about diversifying from the tech mega-caps. Then again, if the mega-caps keep growing and keep beating earnings it’s hard to blame people for sticking with their gains. This is just not a foregone conclusion in the slightest.
The upcoming reports will be from Apple Inc. (NASDAQ: AAPL), Microsoft Corporation (NASDAQ: MSFT); Alphabet, Inc. (NASDAQ: GOOGL); Meta Platforms Inc. (NASDAQ: META); and Amazon.com, Inc. (NASDAQ: AMZN). All in all, that’s about $12 trillion worth of stocks reporting from just Tuesday through Thursday. Now look at the gains YTD in each of these leaders reporting this week:
- Apple +20% YTD
- Microsoft +14% YTD
- Google (Alphabet) +18% YTD
- Meta +62% YTD
- Amazon +24% YTD
It may be easy to sound an alarm after all of these have performed well over an extended period of time. But the calls to move out of the key market driving stocks are not universal. Of the stocks above, every single one of them have consensus analyst price targets that are handily above the current share prices. This means many analysts are still expecting solid performance ahead from the top mega-caps.
WEIGHTINGS DILEMMA
If it is time for the breadth of the market to widen out, then this may only be a continued case for the Invesco S&P 500 Equal Weight ETF (NYSEArca: RSP) over the SPDR S&P 500 ETF Trust (NYSEArca: SPY). Because the mega-caps offer lower dividends in general, the SPY’s dividend yield of 1.21% is lower than the listed 1.49% dividend yield for the RSP. The SPY has the most liquidity of daily inflows and outflows of all S&P ETFs but here is the dilemma with a 26.11% weighting from just the top 5 members of the entire S&P 500:
- Apple (7.27%)
- Microsoft (6.57%)
- NVIDIA (6.13%)
- Amazon (3.57%)
- Meta (2.57%)
The Invesco S&P 500 Equal Weight ETF (NYSEArca: RSP) tracks the S&P 500 Equal Weight Index, which equally weights all 500 stocks (at an implied start of around 0.2% weight per stock). This gives the smaller companies in the S&P 500 Index the same weighting as the large mega-caps. The index is rebalanced quarterly. Invesco shows its weightings as of September 30:
- Vistra Energy (0.27%)
- Constellation Energy (0.26%)
- Las Vegas Sands (0.24%)
- Wynn Resorts (0.24%)
- Intel (0.23%)
HOW THE GAINS STACK UP IN 2024
As the top tech stocks are still so large and have strong gains, the “SPY” ETF still has a better record:
- SPY +21.8% YTD and +38.7% over a year
- RSP +12.9% YTD and +31.4% over a year
Now let’s narrow the performance and it looks like the SPY is still holdings its own:
- SPY -0.95% one-week; +1.18% one-month; +6.3% three-month; and +13.9% six-month.
- RSP -2.07% one-week; -0.2% one-month; +4.8% three-month; and +9.6% six-month.
OUTSIDE CALLS TO DIVERSIFY
In a mid-October podcast, Goldman Sachs’s Chief Global Equity Strategist Chriss Hussey outlined in a note to “Diversify & Amplify” to not be so reliant upon mega-cap tech stocks. The report notes that U.S. currently accounts for roughly 70% of the global market, and only about 5 stocks account for nearly 20% of the entire equity market. Mid-cap stocks and companies with exposure to other geographies at cheaper valuations were also pointed out at winners (like European bank stocks).
While small-caps are not anywhere close to the same, many investors are also hoping for a rebound in small-cap stocks. Morgan Stanley has issued three reasons why the favorable economy and falling interest rates may not warrant a victory for small-cap stocks.
JPMorgan Insights did not exactly address this as a time to diversify into a wider part of the market. That said, it has an evergreen piece here about the risks and impact of holding a concentrated stock position. If you invested in any of the top mage-cap stocks a few years ago in the same percentage as others or index funds, it is very possible that half (or more) of your invested wealth is locked up in a single position.
Whether or not you choose to diversify your gains and positions ahead is entirely up to you. Oggonomics is not offering investment advice here in this report, nor is this intended as a recommendation to buy or sell any of the securities mentioned.
