Many investors have experienced extraordinary stock market gains over the past two years, with the S&P 500 up 26.3% in 2023 and another 25% in 2024. For perspective, the long-term average annual return for the S&P 500 index is 9.7%.
Even more impressive, the last time the S&P 500 saw back-to-back 25%+ gains was 1997-1998.
One downside: Those big returns in ’23 and ’24 were driven almost entirely by a small handful of stocks. Collectively, the Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) soared nearly 250% over the past two years, fueled by investors’ hope that AI will transform how the world does business. The index’s 10 largest companies rose 129% (see the chart).
In stark contrast, the return of the S&P 500 equal weight index over this period was “just” 29%—a gap of 100 percentage points compared to the top 10 largest stocks.
Concentration of S&P 500 Returns, 2023 – 2024
Source: Bloomberg, calculations by Horizon Investments, data as of 12/31/2024. Indices are unmanaged and do not have fees or expense charges, both of which would lower returns. It is not possible to invest directly in an index.
Such extreme return concentration may cause some investors with well-diversified portfolios to feel left behind, even after benefiting from the S&P 500’s historically strong performance. In today’s environment, we believe this is hardly the first time market returns have been exceedingly top-heavy. For example, the “nifty 50” stocks of the 1960s and early 1970s drove the broader market higher for years before suffering an extended period of dramatic and unexpected underperformance. Similarly, red-hot tech stocks in the late 1990s hit a wall in the early 2000s.
The upshot: Maintaining a well-diversified portfolio is essential as the market is inherently unpredictable. Diversified investment strategies that include a wide range of individual stocks from multiple market sectors play a key role in goals-based portfolios seeking to strike a balance between risk and potential reward—especially for investors in (or soon to be in) retirement.
By Mike Dickson
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Disclosure Information
A long-term average is a calculation that takes place over a longer period of time than a short-term average, and uses more data points to provide a more accurate representation of a trend. The S&P 500 or Standard & Poor's 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The Magnificent 7 Index tracks the performance of the seven leading, high-performing technology companies in the United States, often including Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Nvidia, and Tesla. The S&P 500 Top 10 Index consists of 10 of the largest companies from the S&P 500. The S&P 500 Top 50 consists of 50 of the largest companies from the S&P 500, reflecting U.S. mega-cap performance. The S&P 100, a sub-set of the S&P 500®, measures the performance of 100 large-cap companies in the United States. The S&P 500 Equal Weight Index is a stock index that gives equal weight to each company in the S&P 500, rather than being weighted by market capitalization. References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. It is not possible to invest directly in an index. Information obtained from third party sources is believed reliable but has not been vetted by the firm or its personnel.
This commentary is written by Horizon Investments’ asset management team. Past performance is not indicative of future results. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This report does not attempt to examine all the facts and circumstances that may be relevant to any company, industry, or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Horizon Investments, LLC (“Horizon”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice, or recommendation in this document, clients should consider whether the security in question is suitable for their particular circumstances and, if necessary, seek professional advice. Investors may realize losses on any investments. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. All investing involves the risk of loss.
The investments recommended by Horizon Investments are not guaranteed. There can be economic times when all investments are unfavorable and depreciate in value. Clients may lose money. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The opinions expressed herein are our opinions as of the date of this document. These opinions may not be reflected in all of our strategies. We do not intend to and will not endeavor to update the information discussed in this document. No part of this document may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without Horizon’s prior written consent. Forward-looking statements cannot be guaranteed. Other disclosure information is available at www.horizoninvestments.com.
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