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Market Commentary – Q2 2023

Written by Theresa Gusman

Market Commentary

The “Other 493” Play Catch Up

By Theresa Gusman


The S&P 500 increased 8.7% in the second quarter, boosting the first half rise to 16.9% (see Figure 1). 70% of the performance of the S&P 500, more than 95% of the performance of the more concentrated MSCI USA, and 70% of the performance of the MSCI ACWI, were driven by just seven Artificial Intelligence (AI)-driven stocks — Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla. As a result of this market concentration, actively managed large blend funds underperformed their passive counterparts by a whopping 133 basis points in the year to date through June 30th, according to Morningstar Direct. 

The S&P 500’s narrow leadership in the first half camouflaged paltry returns from most of the index (see Figure 2). The low single digit gains posted by the “other 493” S&P 500 companies in the first half are more reflective of the current market environment – and in line with our expectations – than the 16.9% AI-fueled gain recorded by the S&P 500. Coming into 2023, most observers were convinced the US economy would dip into a recession. In fact, the Philadelphia Fed survey from January showed nearly 44% of respondents predicted a recession would happen in the next 12 months, the highest number in more than a decade. Inflation has moderated and recession has been averted to date. As a result, corporate earnings exceeded analysts’ expectations in the first quarter, and according to FactSet, blended S&P 500 earnings reported to date have exceeded the projected 9.0% decline in the second quarter. 

Further gains in July have put the market within striking distance of its January 2022 peak. However, with earnings estimates rising broadly, valuations of the “other 493” are not extended. The degree to which Information Technology valuations have been stretched relative to the market in the first half is shown in Figure 3. Whereas the Price/Earnings (P/E) ratio of the Information Technology sector is near its 10-year high, the valuations of nine of the ten sectors in the S&P 500 are at, marginally above, or marginally below their 10-year averages.  

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