Investors Advised to Consider Equal-Weighted Version of S&P 500 Index in Second Half of 2023
Investors looking for better opportunities in the stock market may find owning the equal-weighted version of the S&P 500 index more favorable in the second half of 2023, following a surge in the popular gauge driven by narrow breadth during the first six months of the year. Analysts at BofA Global Research suggest that despite some improvement in sentiment, caution still looms on Wall Street. This cautious sentiment indicates that the pain trade is likely to continue upward.
According to a recent note by BofA, only 25% of stocks outperformed the S&P 500 during the first half of 2023, marking the narrowest breadth in the first six months ever recorded. The S&P 500 Equal Weight index (SP500EW) significantly lagged behind during this period, although it did show some outperformance in June.
The BofA strategists predict that breadth will continue to expand, similar to what was observed in June, and expect the equal-weighted index to outperform the cap-weighted index in the second half of 2023.
The impressive gains of the S&P 500 index this year have been largely driven by megacap stocks, including Apple Inc. (AAPL), Microsoft Corp. (MSFT), Google parent Alphabet Inc. (GOOG, GOOGL), Amazon.com Inc. (AMZN), Nvidia Corp. (NVDA), Tesla Inc. (TSLA), and Facebook parent Meta Platforms Inc. (META).
The Most Influential Names in the S&P 500 Index
According to DataTrek Research co-founder Jessica Rabe, seven names hold significant influence in the capitalization-weighted S&P 500 index. Together, these names impact the index returns more than any other sector, except for information technology. Currently, the tech sector carries a weight of 28.2%.
Market performance over the past year has been exceptional for several companies. Shares of chipmaker Nvidia have experienced an astonishing 187% increase, while Meta has soared by over 144%. Tesla, another major player, has seen a surge of about 125%. Apple, with the largest weight in the S&P 500, has jumped by approximately 47% this year, reaching a market value of around $3 trillion.
The first half of 2023 has been particularly strong for the S&P 500, with a rise of 15.9%. This marks its strongest performance for the first half of a year since 2019. The previous year witnessed a significant downturn due to the Federal Reserve’s interest rate hikes to combat rising inflation. These measures had a widespread negative impact on stocks and bonds, resembling the effects of the 2008 financial crisis.
Investor interest has also shifted towards the Invesco S&P 500 Equal Weight ETF (RSP), which tracks an index of S&P 500 companies with equal weights. Over the past month, this ETF has gained approximately $4.5 billion in inflows. During the first half of this year, shares of the RSP ETF rose by 5.9%.
Overall, the S&P 500 continues to experience notable developments and remains a focal point for investors seeking growth opportunities.
Read: Recession canceled? U.S. stock market ‘pretty frothy’ after S&P 500’s strongest first half since 2019.
U.S. Stock Market Trading Lower as Treasury Yields Jump
On Thursday, the U.S. stock market experienced a decline as Treasury yields surged, prompted by a report from payroll-services company ADP revealing that the private sector had added a significantly higher number of jobs in June than economists had anticipated. According to FactSet data, the S&P 500 index was down 0.8%, while the Dow Jones Industrial Average fell 1.1% and the Nasdaq Composite dropped 0.9%.
ADP Report and Market Reaction
While the ADP report showed impressive gains in June, some caution is advised when relying on this metric for month-to-month changes within the official labor report. Jeffrey Roach, chief economist for LPL Financial, highlighted this concern in his emailed commentary on Thursday. The U.S. government is scheduled to release its employment report for June on Friday.
Fed’s Actions and Stock Performance
Unless Friday’s employment report turns out to be much weaker than expected, it is unlikely that the Federal Reserve will alter its plans to increase rates during the upcoming scheduled meeting later this month. This analysis was shared by Roach, indicating that the Fed’s decision will hinge on the strength of the report.
Despite concerns over valuation, a group of seven megastocks known as Big Tech could still drive the S&P 500 index higher. DataTrek outlined that cost-cutting measures, a resilient U.S. economy, and enthusiasm surrounding generative artificial intelligence have been key factors contributing to the rally of Big Tech stocks throughout this year.
Reimagining the Distinctive Growth of US Big Tech
US Big Tech companies have been making waves in the market, with better upside earnings revisions and promising expected 2024 earnings growth compared to the broader US equity market. The abundance of opportunities presented by Generation AI, or gen AI, will play a crucial role in shaping the future of these tech giants.
Unveiling the Potential
These tech behemoths, while boasting rich valuations, are keenly aware of the significance their reported results and guidance hold during the upcoming earnings season. These insights will shed light on the immense impact gen AI can have on their top and bottom lines in the quarters to come.
Rising above the Rest
US Big Tech is not only outperforming other sectors but also demonstrating an optimistic trajectory for growth. The market eagerly awaits to witness how these companies harness gen AI’s potential and leverage it to achieve remarkable success.
Embracing the Future
As gen AI continues to revolutionize industries, US Big Tech is at the forefront of this transformational journey. Their steadfast commitment to innovation and their discernment in seizing opportunities will shape their destiny significantly. The upcoming earnings season serves as a pivotal moment where these companies will showcase the tremendous advancements made with gen AI, reinforcing their position as leaders in today’s dynamic digital landscape.
Stay tuned as we unfold the remarkable saga of US Big Tech, where gen AI enthrones innovation and drives unprecedented growth.
