S&P 500 Bull Market Kicks Off, But The Dominance Of 7 Stocks Leaves S&P 493 In The Dust

The S&P 500 index, represented by the SPDR S&P 500 ETF Trust (NYSE:SPY), officially entered a bull market on June 8, surging more than 20% since its October 2022 lows.

The S&P 493 index, which excludes the performance of only seven of the 500 largest U.S. stocks, remains nearly unchanged in 2023.

Apple Inc. (NASDAQ:AAPL), Microsoft Corp. (NASDAQ:MSFT), Alphabet Inc. (NASDAQ:GOOG) (NASDAQ:GOOGL), Amazon.com, Inc. (NASDAQ:AMZN), Meta Platforms Inc. (NASDAQ:META), NVIDIA Corp. (NASDAQ:NVDA) and Tesla, Inc. (NASDAQ:TSLA) are the dominant seven stocks shaping the market landscape in 2023, and the following data will shed light on the reasons behind their influence.

Chart: 7 Most Capitalized U.S. Stocks vs. S&P 500 vs. S&P 500 Equal Weight

Astounding Outperformance: An exclusive index, consisting solely of the seven stocks mentioned above, has skyrocketed by 83% year-to-date, in stark contrast to the 13% gain in SPY and the mere 3% increase in the Invesco S&P 500 Equal Weight ETF (NYSE:RSP).

Remarkable Weight Concentration: Twenty-six percent of the S&P 500 index is represented by these seven companies. Their combined market cap reaches $10.6 trillion compared to the $27 trillion of the other 493 stocks.

Elevated Valuations: The seven S&P heavyweights are significantly overvalued in comparison to the rest of the market. While they trade at an average forward price-to-earnings (P/E) ratio of 40, the S&P 500 index’s remaining 493 stocks trade at an average forward P/E ratio of 17.

Differing Upside Prospects: The seven tech giants currently screen a 5% price upside potential to Wall Street analysts’ current median price target, with Tesla trading 15% higher and NVIDIA trading 17% lower. The remaining 493 companies, on the other hand, have a 13% potential upside to the analysts’ median price targets. Notably, Moderna Inc. (NYSE:MRNA) is the S&P 500 stock with the highest gap to the median price target, which is 65% higher than current market prices.

Factors Contributing to These 7 Stocks’ Market Dominance

• Artificial Intelligence (AI): The adoption of AI has played a critical role in fueling the remarkable growth of these prominent tech stocks, positioning them at the forefront of the technological revolution.
• End of Federal Reserve Policy Tightening: Stocks with higher valuations stand to benefit from market expectations that interest rate hikes will eventually end, creating a favorable environment for these companies.
• Concentration in Exchange-Traded Funds (ETFs): Because these stocks are heavily weighted in major capitalization-based indices, they receive a disproportionate share of ETF inflows compared to the broader market, amplifying their influence and market dominance.

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