Charting our Focus

 Time to Invest in the Average Stock versus the Biggest?

Consider investing in the average stock and underweighting the megacaps¹

Mega cap stocks have long dominated market returns, but a reversal may be underway. As shown above, the S&P 500 capitalization (size) weighted Index (SPX) outperformed the S&P 500 equal-weighted Index (SPW) in most months from 2015-2020. The reason is that the five largest stocks in the S&P 500 by market capitalization – Alphabet, Amazon, Apple, Meta Platforms, and Microsoft* - returned 125%, 381%, 444%, 161%, and 339%, respectively, from 1/1/2016 to 12/31/20, compared to 102% for the SPX itself. These stocks contributed significantly to returns as they represented 21% of the SPX as of the year-end 2020.  By comparison, the weight of the same five stocks in the SPW amounted to 1%.  As a result, the SPW returned only 83% over the period.

Since August of 2020, however, the SPW has outperformed the SPX in most months. Why? We believe there are three reasons:

• First, the mega cap stocks benefitted from the stay-at-home environment (red bar in March of 2020 shows big outperformance of SPX vs. SPW) during the pandemic as consumers used technology to work, socialize, and purchase goods.  This benefit waned as the pandemic progressed. 
• Second, inflation as measured by the Consumer Price Index increased from 1.4% year-over-year in 2020, to 7.0% in 2021, moderating only slightly to 6.5% in 2022. Higher inflation, specifically in commodities such as oil, benefitted value stocks, which have more commodity exposure such as oil than growth stocks.  Because the SPW is equal weighed, it has more exposure to value stocks than the SPX, which is dominated by mega cap growth stocks. 
• Finally, Fed rate increases caused stock valuations to compress as the cost of capital increased.  Mega cap stock valuations were well above average, making them vulnerable to valuation compression as interest rates rose.

¹Mega cap stocks are generally defined as companies with a market capitalization above $200 billion.
*Source: Bloomberg – The average PE multiple on 2/28/23 of Alphabet, Amazon, Apple, and Microsoft, for example, was 43x earnings, more than twice the SPX at 19x.

Stocks mentioned are for illustrative purposes only, and not a recommendation to buy or sell any security. 

While the mega caps have rallied YTD, we believe the rally is likely to be short-lived given the exposure of the megacaps to a slowing economy, and valuation as the four remaining mega caps (Meta no longer a top five) together trade at a rich 50% price-to-earnings premium the SPX.  Moreover, the high concentration in the SPX is risky in our view with Apple and Microsoft currently representing over 12% of the index as of February 28, 2023.

Terms and Indices

Average Stock: Average stock refers in this analysis to  the bottom 450 stocks of the S&P 500.

Consumer Price Index: a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Price/Earnings, or PE, is a valuation measure of expensiveness using a stock’s price divided its by per-share earnings. Forward PE represents analyst consensus estimates of that measure over the next 12 months.

Megacap stock: A designation for the largest companies in the investment universe as measured by market capitalization. While the exact thresholds change with market conditions, megacap generally refers to companies with a market capitalization above $200 billion.

S&P 500 Equal Weight Index: The US Standard and Poor's 500 is a stock market index that tracks 500 publicly traded domestic companies. In the Equal Weight Index, each stock makes the same contribution to the index, regardless of company size.

S&P 500 Index: The US Standard and Poor's 500 is a stock market index that tracks 500 publicly traded domestic companies. In this index, the weighting of each in the index is dependent on the company’s market capitalization.

Indices are unmanaged and their returns assume reinvestment of dividends and do not reflect any fees or expenses. It is not possible to invest directly in an index.

Unless otherwise stated, all information contained in this document is from Amundi Asset Management US (Amundi US) and is as of 2/28/2023.

A Word About Risk: Pioneer Fund

The market prices of securities may go up or down, sometimes rapidly or unpredictably, due to general market conditions, such as real or perceived adverse economic, political, or regulatory conditions, recessions, inflation, changes in interest or currency rates, lack of liquidity in the bond markets, the spread of infectious illness or other public health issues or adverse investor sentiment.The Fund generally excludes corporate issuers that do not meet or exceed minimum ESG standards. Excluding specific issuers limits the universe of investments available to the Fund, which may mean forgoing some investment opportunities available to funds without similar ESG standards.

The views expressed regarding market and economic trends are those of Amundi Asset Management US, Inc. ("Amundi US"), and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any portfolio.

Investing in mutual funds involves significant risks. For complete information on the specific risks associated with each fund, please see the appropriate fund’s prospectus or fact sheet, available on our  literature page.

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Before investing, consider the product's investment objectives, risks, charges and expenses. Contact your financial professional or Amundi US for a prospectus or summary prospectus containing this information. Read it carefully. To obtain a free prospectus or summary prospectus and for information on any Pioneer fund, please download it from our  literature section.

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