In 2023, the stock market rally has predominantly been driven by a select group of stocks. This phenomenon, known as narrow leadership, can persist for extended periods, and while it is part of the natural cycle of markets, it can pose challenges for investors who have diversified portfolios, especially when market trends begin to shift.

It's imperative, therefore, for investors to maintain a thorough understanding of their investments and a strategic approach to diversification. By doing so, they can better navigate potential market fluctuations and prepare for future investment scenarios, thus optimizing their portfolio performance in an evolving market landscape.

What is Happening Currently?

The stock market (S&P 500 index) is up nearly 17% for the first half and has proven surprisingly resilient despite numerous challenges. These include ongoing recession worries, instability in regional banks, and high inflation. 

However, for many investors, the S&P 500’s performance does not reflect the results of their diversified equity portfolios.

That’s because a narrow group of big technology-related stocks, many powering artificial intelligence (AI), are dominating the returns in the overall index. These stocks are some of the largest in the S&P 500 index and include Advanced Micro Devices, Alphabet (Google’s parent company), Amazon, Apple, Meta Platforms (formerly Facebook), Microsoft, Nvidia and Tesla. For the year, these eight stocks contributed 14.6%, while the rest of the stocks in the S&P 500 only contributed 2.1%.

Source: Bloomberg. Year-to-date data as of 6/30/2023.  AI-related companies defined as: Alphabet, Apple, Amazon, AMD, Nvidia, Meta, Microsoft, Tesla

Why Does it Matter?

This has three implications. First, as an investor, if your portfolio did not include some of these names, you have likely underperformed the index. Notably, if your portfolio owned high-quality dividend stocks, then you may even see losses for the year, as these stocks were not in vogue in 2023 after showing resiliency in turbulent markets in 2022.

Second, owning the S&P 500 is not as diversified as investors may think and does not equate to owning a basket of 500 stocks equally. The S&P 500 is a market cap index, which means that the larger stocks carry more weight in the index. The top 10 companies account for almost 32% of the index’s weight, a record concentration dating back at least three decades¹. This means that investor dollars in the S&P 500 index are reliant on the performance of just a few companies. If these companies don’t pull their weight in terms of generating profits to meet the hype, this could prove challenging for future returns.
 
Lastly, many investors in the US are naturally biased toward domestic stocks, given this is their home turf. This has served many investors well, as the US stock market has outperformed many of its international peers for the last decade and a half. However, this home bias has magnified the risk of concentration in investors’ portfolios. As the US has beaten its international peers, its size in the global equity market now accounts for approximately 60%² of the value of all the stocks in the world, a roughly 12% increase over the last decade³. In fact, Apple, the most highly valued public company in the US today, has a valuation greater than the entire UK stock market, the third biggest stock market in the world, and twice the size of Germany’s entire stock market. 

Key Takeaways

The S&P 500’s nearly 17% year-to-date total return masks the uneven and narrow market participation driven by AI. For investors, this concentration could leave their portfolio vulnerable to potential losses should the hype fizzle out.

With a slowing economy and ongoing high inflation, equity markets could prove more challenging in the second half of the year. Investors should be mindful of what they own and ensure they are truly diversified for what lies ahead.

Questions?

If you have questions about how you can diversify and optimize your portfolio to help navigate potential market fluctuations, we're here to help!

Contact us today.

Michael Embrescia is a financial advisor located at EmVision Capital Advisors, 251 W. Garfield Rd. ​Suite 155 Aurora, OH 44202. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network^®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (330) 954-3770 or at info@emvisioncapital.com.

¹ JPMorgan Guide to the Markets. Q3 2023
² https://www.msci.com/documents/10199/a71b65b5-d0ea-4b5c-a709-24b1213bc3c5
³ https://www.msci.com/documents/1296102/27036039/MSCI+ACWI.pdf
⁴ Dimensional Funds, 2023 Matrix Book

Important Information
This is for informational purposes only, is not a solicitation, and should not be considered investment, legal or tax advice. The information in this report has been drawn from sources believed to be reliable, but its accuracy is not guaranteed, and is subject to change. Investors seeking more information should contact their financial advisor. Financial advisors may seek more information by contacting AssetMark at 800-664-5345.

Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss. Actual client results will vary based on investment selection, timing, market conditions, and tax situation. It is not possible to invest directly in an index. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Index performance assumes the reinvestment of dividends.

Investments in equities, bonds, options, and other securities, whether held individually or through mutual funds and exchange-traded funds, can decline significantly in response to adverse market conditions, company-specific events, changes in exchange rates, and domestic, international, economic, and political developments.
Bloomberg® and the referenced Bloomberg Index are service marks of Bloomberg Finance L.P. and its affiliates, (collectively, “Bloomberg”) and are used under license. Bloomberg does not approve or endorse this material, nor guarantees the accuracy or completeness of any information herein. Bloomberg and AssetMark, Inc. are separate and unaffiliated companies.

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