Adam Turnquist | Chief Technical Strategist
Key Takeaways:
- This year will likely be remembered as the year of the Magnificent Seven. While these stocks have done most of the heavy lifting for the S&P 500, it has not been a zero-sum game, as several offensive-tilted sector stocks are also beating the market this year.
- While periods of narrow leadership present concentration risk and a lack of participation from other important sectors, they have historically not been a precursor to a market top. For example, S&P 500 annual returns following its 10 most top-heavy years averaged 14.1%, with 80% of occurrences finishing in positive territory.
- Following year index returns after the 10 most top-heavy S&P 500 years have averaged 14.1%, with 80% of occurrences finishing in positive territory.
- LPL Research believes the large cap growth narrative will remain intact in 2024 and expects a continuation of offensive sector leadership.
Narrow leadership has been one of the major themes throughout 2023. The so-called Magnificent Seven mega-caps — Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla — have contributed to 60% of the S&P 500’s 26.5% total year-to-date return (as of December 27). Given this top-heavy concentration and a lack of participation from the financial sector for most of the year (the sector with the second-highest number of S&P 500 stocks), only around 29% of S&P 500 constituents are beating the index on a total return basis this year. The chart below highlights that 2023 will likely have one of the lowest percentages of stocks outperforming the market over the last 40 years.
One of the Narrowest Leadership Years in 40 Years
Percentage of S&P 500 Outperformers by Year
![Percentage of S&P 500 Outperformers by Year chart Bar graph depicting percentage of S&P 500 outperformers from 1983 to 2023 as noted in the preceding paragraph, with 2023 having one of the lowest percentages.](https://www.lpl.com/content/dam/edam/brand/elements/charts/spx-outperformers-by-year-12-28-23-chart-1.png)
Source: LPL Research, Bloomberg 12/27/23
Disclosures: Past performance is no guarantee of future results.
All indexes are unmanaged and can’t be invested in directly.
Not a Zero-Sum Game
This year’s outsized gains and contributions from the Magnificent Seven have largely overshadowed pockets of relative strength across several S&P 500 sectors. As illustrated in the table below, it is not a zero-sum game as roughly two-thirds of technology sector stocks are beating the tape this year, while around 40% of communication services, consumer discretionary, and industrial stocks are also outperforming. Collectively, these three sectors and technology represent around a 57% weighting within the S&P 500.
Percentage of Sector Stocks Outperforming This Year
![Percentage of S&P Sector Stocks Outperforming in 2023 chart Bar graph of S&P 500 sectors depicting percentage of sectors greater than or equal to S&P 500 total return year to date as described in preceding paragraph.](https://www.lpl.com/content/dam/edam/brand/elements/charts/sp500-sector-stocks-outperforming-12-28-23-chart-2.png)
Source: LPL Research, Bloomberg 12/27/23
Disclosures: Past performance is no guarantee of future results.
All indexes are unmanaged and can’t be invested in directly.
While 2023 will likely have one of the lowest percentages of stocks beating the market in 40 years, history suggests top-heavy years don’t translate into market tops over the following year. As illustrated in the table below, S&P 500 annual returns following its 10 most top-heavy years averaged 14.1%, with 80% of occurrences finishing in positive territory. For those expecting a small cap catch-up rally next year, we also included the following year’s returns for the small cap Russell 2000 Index. While small caps outperformed the S&P 500 60% of the time over the next year, both the average and median Russell 2000 returns were underwhelming relative to the S&P 500.
Top-Heavy Doesn’t Mean Market Top
Ten Most Top-Heavy S&P 500 Years
Year | Percentage of S&P 500 Outperformers | S&P 500 Annual Return | Next Year S&P 500 Return | Next Year Russell 2000 Return | Next Year S&P 500 vs. Russell 2000 |
1998 | 28.4% | 26.7% | 19.5% | 19.6% | -0.1% |
2023 | 29.1% | – | – | – | – |
1999 | 31.0% | 19.5% | -10.1% | -4.3% | -5.8% |
2020 | 33.3% | 16.3% | 26.9% | 13.7% | 13.2% |
1987 | 39.2% | 2.0% | 12.4% | 22.4% | -10.0% |
1995 | 40.2% | 34.1% | 20.3% | 14.8% | 5.5% |
1990 | 40.4% | -6.6% | 26.3% | 43.4% | -17.0% |
1996 | 41.0% | 20.3% | 31.0% | 20.7% | 10.3% |
1997 | 41.8% | 31.0% | 26.7% | -3.8% | 30.5% |
1984 | 42.0% | 1.4% | 26.3% | 28.0% | -1.6% |
2007 | 43.0% | 3.5% | -38.5% | -34.8% | -3.7% |
Average | 14.8% | 14.1% | 12.0% | 2.1% | |
Median | 17.9% | 23.3% | 17.2% | -0.8% | |
Percent Positive | 90.0% | 80.0% | 70.0% | 40.0% |
Source: LPL Research, Bloomberg 12/27/23
Disclosures: Past performance is no guarantee of future results.
All indexes are unmanaged and can’t be invested in directly.
Summary
The narrow leadership theme of 2023 has gained a lot of attention due to the historically outsized contributions from the Magnificent Seven stocks. While periods of narrow leadership present concentration risk and a lack of participation from other important sectors, they have not historically been a precursor to a market top. In addition, there is still a sizable percentage of offensive sector stocks beating the market this year, a largely overlooked storyline. Looking ahead to 2024, LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC) believes the large cap growth narrative will remain intact and is tactically overweight growth-style equities relative to value. The STAAC also expects a continuation of offensive sector leadership, including overlooked sectors like financials, as they finally start to participate in this bull market.
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Asset Class Disclosures –
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Bonds are subject to market and interest rate risk if sold prior to maturity.
Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.
Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.
Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings of commodities will result in significant volatility in an investor’s holdings.
Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value