Exceptional strength of the strongest in the S&P 500

Chart of the week

More strongly than ever before, the U.S. equity market is being driven by a few heavyweights. This cannot last forever, but at the moment there is a lot to be said for the big boys.

The largest stocks by market capitalization, especially from the technology and communication-services sectors, have once again demonstrated this year, why they are many investors' favorites.  Especially during the market slump they outperformed their S&P 500 peers. The overall index has lost 10.8% since the beginning of the year. Deducting only the five biggest winners (measured in terms of the growth in absolute market value), the slump would have amounted to 14%.

Our "Chart of the Week" shows this phenomenon in a different way by comparing the performance of the S&P 500 with that of the equally-weighted S&P 500.[1] In other words it shows to what degree the index performance has been driven by the largest stocks. This year's sharp rise – only matched in 1999 – underscores the importance of the heavyweights, which is also evidenced by the fact that the five largest alone account for over one-fifth of the S&P 500 market capitalization. This concentration is even higher than during the dotcom bubble of 2000. How long can this continue?

Many investors are familiar with the theory of mean reversion, according to which every trend returns to its mean value over time. After all, a sector cannot outperform forever, or it would eventually occupy the entire index. Sooner or later, technology stocks are likely to underperform again. At the moment it looks more like "later," though. The current coronavirus crisis, above all, makes it clear that the triumph of technology stocks is not just a cyclical phenomenon but a trend that we believe is likely to extend over more than a decade. What also benefits the major technology stocks these days is their balance-sheet strength. The same is true for the health-care sector, which should also demonstrate its defensive qualities, especially in this health crisis. Even though these sectors are among our favorites at present, this should be seen in relation to the entire U.S. market, on which we are slightly cautious in the short term. Current valuations seem to rely heavily on strong support from the U.S. Federal Reserve and less on the economic outlook.

20200430_CotW_S&P500 equal weighted_CHART_EN_V2_72DPI.png

* 12 months rolling
Sources: Refinitiv, DWS Investment GmbH as of 4/27/20

1. Here, every stock has the same weighting of 0.2%.

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