Financial Markets Review

Last month, strength in the market-cap weighted S&P 500 and the tech centric Nasdaq persisted with both indices logging their second straight monthly gain and fifth monthly gain since the start of the year. The S&P 500 rose 3.5%, while the Nasdaq rocketed even higher, to the tune of 6%. Once again though, it was Groundhog Day in June. The narrative that has dominated markets for nearly two years now continues in force, as the big keep getting bigger while most everything else languishes. While big tech stocks drove the market-cap weighted S&P 500 and Nasdaq higher, declines were had in both the small-cap Russell 2000 and equal-weighted S&P 500, as each index fell 1.1% and 0.9%, respectively.

As we’ve highlighted on many occasions over the past year, one way to measure the impact that the largest companies are having on broader financial markets is to examine the performance dispersion between the market-cap weighted S&P 500 and equal-weighted S&P 500. As the name implies, the market-cap weighted S&P 500 has the greatest allocation to the largest companies by market cap. Whereas, within the equal-weighted S&P 500, each company has the same allocation regardless of size. Currently, within the market-cap weighted S&P 500, Microsoft, Apple and Nvidia make up 21% of the entire index. Then when you add in the next three largest companies – Amazon, Meta and Alphabet – the six largest companies make up nearly 32% of the entire S&P 500 index. Within the equal-weighted S&P 500 index, these same six companies make up 1.4% of the index. Therefore, the equal-weight S&P 500 eliminates the ability for any one or even a few companies to dominate the index’s performance.

We have already noted the dispersion between the market-cap and equal-weighted indices in June, but looking back even further, June was just a continuation of the trend. For Q2, strength in the Magnificent 7 stocks propelled the market-cap weighted S&P 500 to new record highs, advancing 3.5%, while the equal-weighted S&P 500 fell 3% over the same timeframe. The stark difference between the two indices has led many to voice concerns regarding market breadth amid such narrow market leadership, which is stirring up comparisons to the Tech Bubble. Since the beginning of the year, Nvidia has accounted for roughly one-third of the market-cap weighted S&P 500’s entire return. When you add Microsoft, Amazon and Meta, those four stocks have contributed nearly 50% of the entire index’s return! The outperformance amongst a handful of the largest companies has caused the return differential between the equal-weighted S&P 500 and the market-cap weighted S&P 500 to be at its largest spread since 1999.

As the market-cap weighted S&P 500 continues to set a record nearly every day, the sheer number of stocks that are underperforming the index is truly stunning. According to Ned Davis Research, only 25% of S&P 500 stocks are outperforming the index over the first half of this year, which is on pace to be a record low. Over the past 60+ years, the only other time so many stocks within the S&P 500 were underperforming the index return was in 1998. And most recently, according to Dean Christians of SentimenTrader, the percentage of stocks within the S&P 500 that are outperforming the index over any 21-day rolling period just dropped to the lowest in history, which spans nearly 100 years of data.

Weakness under the surface of the broader indices appear to also be coinciding with a recent streak of weaker economic data. The Citi Economic Surprise Index is at its most negative level since the summer of 2022, as the June ISM Services index unexpectedly moved back into contractionary territory. At the same time, the labor market has showed signs of cooling with the unemployment rate ticking higher for the third consecutive month to the highest level since November 2021. The recent spate of weak economic data coupled with somewhat downbeat commentary from several retailers and consumer companies has reignited calls for the Fed to begin cutting rates. An uptick in negative economic surprises would likely solidify expectations for the Fed to embark on a rate cutting cycle. However, as much as rate cuts might be spun as a positive for equities, it should also elicit a measure of caution, as rate cuts would signify real headwinds for economic and corporate growth.

Tandem Strategy Update*

It goes without saying that the market environment we find ourselves in has been tough to navigate. When investing for the long-term, one of the hardest things to do is stay invested and committed to your plan. At every turn, there is something that can lead you astray in hopes for a better outcome. And rarely does it work out in one’s favor. Investment philosophies or asset allocation strategies that once worked are seemingly stuck in the mud. It’s hard to wonder, but is this time really different?

I contend that it is not different. But in the moment, it can be difficult to convince oneself otherwise. It is very easy to get caught up in chasing the next hot fad and lose sight of the risks you are taking on. In the late 90s, unless you were a growth manager, you woefully underperformed. That was until technology stocks peaked in March 2000 and everyone quickly realized that the price you pay for something really does matter. A few years later, unless you owned a couple of houses, it was easy to think you were missing out on generational wealth creation through real estate. It just so happens that maybe it wasn’t too healthy after all for home prices to rise at a 20% annual clip.

Long-time followers of Tandem have likely heard us say that our strategies are not the “market”. They are not designed to look like or perform like the “market”. We are active managers who look for opportunities in individual businesses regardless of what is going on in the “market”. Our clients are business owners, not “market” owners. Ultimately, we are looking for businesses that can consistently grow revenues, earnings and cash flows through any economic cycle. If the companies pay a dividend, we demand that it also grows. There are times when the companies we own are in favor and other times when they are simply temporarily unloved. But at no time is it part of our process to chase what is doing well for the sake of trying to “beat the market”. The second we do that we lose the ability to do what we have always said we would do, which is to provide a more consistent, more repeatable and less volatile investment experience.

*The transition level activity taken by Tandem is applicable to new accounts and new money, not the composite or firm-wide level. New accounts and new money are not automatically invested on the first day. Rather, they are transitioned into our strategy over a longer time period that is dependent upon market conditions. Strategy level activity is applicable to the composite and action is taken at the firm-wide level.

Source: Source of all data is FactSet, unless otherwise noted.

Disclaimer: Tandem Investment Advisors, Inc. is an SEC registered investment advisor.

This audio/writing is for informational purposes only and shall not constitute or be considered financial, tax or investment advice, or an offer to sell, or a solicitation of an offer to buy any product, service, or security. Tandem Investment Advisors, Inc. does not represent that the securities, products, or services discussed in this writing are suitable for any particular investor. Indices are unmanaged and not available for direct investment. Please consult your financial advisor before making any investment decisions. Past performance is no guarantee of future results. All past portfolio purchases and sales are available upon request.

All performance figures, data points, charts and graphs contained in this report are derived from publicly available sources believed to be reliable. Tandem makes no representation as to the accuracy of these numbers, nor should they be construed as any representation of past or future performance.​