The stock market in 2023 has generally been dominated by the Magnificent 7: Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG, GOOGL), Amazon (AMZN), Nvidia (NVDA), Meta Platforms (META, formerly Facebook), and Tesla (TSLA). These seven companies are the largest technology/growth companies in the world, collectively comprising ~28.8% of the S&P 500 Index and have experienced massive stock appreciation this year. Their size and outperformance have caused high-level market metrics to become distorted. 

 The traditional S&P 500 Index is up 18.75% year-to-date through November 24, but the equal-weight S&P 500 is up only 3.74%. The difference between the two indexes is their composition weights; the S&P 500 Index weighting is based on the companies’ value (market-cap) while the alternative version assumes all 500 companies have the same weight. This equal-weight version can be a better indicator of the average stock. The Magnificent 7’s outsized impact has hidden what has actually been a weak investing environment in 2023. The rising interest rates, slow growth domestically, strong dollar, and political uncertainty have resulted in the average stock having a weak year. The S&P 500 Equal Weight Index was down 2.72% through October (compared to up 8.31% for the S&P 500 Index), but recent inflation metrics below expectations have started a nice broad-based market rally. 

Another area where the traditional market-cap-weighted S&P 500 Index has caused a dislocation is in valuation metrics (when compared to the S&P 500 Equal Weight Index). According to Bloomberg, the forward estimate price-to-earnings-ratio (P/E) ratio of the S&P 500 Index has averaged 17.6x since early 2010. The equal-weight version was a very similar 17.7x and followed a very similar path over time. However, the higher multiples and massive weights of the Magnificent 7 have caused a material difference between the two index versions; as of November 24, 2023, the actual S&P 500 Index had a forward P/E of 21.0x while the equal weight S&P 500 Index was 17.1x. While the actual S&P 500 Index doesn’t look cheap compared to historical levels, the equal weight looks attractive! We think there are plenty of great opportunities out there.

DISCLOSURE

Innovative Portfolios, LLC (“IP”) is an SEC-registered investment advisor founded in 2015. Clients or prospective clients are directed to IP’s Form ADV Part 2A prior to deciding to participate in any portfolio or making any investment decision. The views and opinions in the preceding publications are subject to change without notice and are as of the date of the report. There is no guarantee that any market forecast set forth in any commentary will be realized. This material represents an assessment of the market environment at a specific point in time, should not be relied upon as investment advice, and is not intended to predict or depict performance of any investment. Any specific recommendations or comparisons that are made as to particular securities or strategies are for illustrative purposes only and are not meant as investment advice for any viewer. The companies mentioned in the publications may be held by Sheaff Brock Investment Advisors, Innovative Portfolios, Innovative Portfolios’ ETFs or any other affiliates or related persons. Therefore, there is a conflict of interest that the advisors may have a vested interest in the Companies and the statements made about them. Past performance does not guarantee or indicate future results.