The large-capitalization S&P 500 index ended the first half of 2020 down a mere 3.1%. As the nearby graph illustrates, returns for larger public companies have easily outpaced both smaller domestic stocks as well as international stocks over multiple time periods, and the first half of the year was no exception. Smaller stocks, as measured by the Russell 2000, fell 13.0% through the end of June, while developed international markets did a little better at -11.3% (measured in dollars). Emerging markets fell 9.8% over the same period.
The dominance of larger stocks has been persistent. Over the past year, large-cap returns are positive (7.5%), while other markets have lost value. The gap over longer time periods is stark, with the S&P 500 easily beating other measures of equity returns on an annualized basis over three-, five- and 10-year periods. Interestingly, the longer-term trend of large-cap dominance reversed in June. For the past month, emerging markets led the way, with the S&P 500 bringing up the rear. One month is not enough to establish a new trend, but this recent shift in market leadership warrants attention.
The U.S. markets are narrowly led. A small handful of technology names dominates the index composition, and the performance of these few companies has skewed the return of the index. Alphabet, Facebook, Apple, Microsoft and Amazon account for over 20% of the value of the S&P 500 and have handily beat the broad market so far this year. There is both good and bad news in this development. The bad news is that narrowly led markets tend to be fragile and volatile. A misstep by any one of these companies, or a simple shift in investor sentiment, could bring the index down sharply. The good news is that, although the index is within a few percentage points of a new all-time high, the average stock is not. There are plenty of opportunities in companies that have not participated in the tech-led rally of the past three months.