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Is The S&P 500 Useful As a Comparative Benchmark?

March 3rd, 2024
CT Capital llc Research

The S&P 500 has lost its utility as a value benchmark for assessing portfolio performance since it cannot match the broad sector composition, volatility of key financial metrics, cost of capital, employment, and its volatility, and other characteristics of measuring value-type equities.

The S&P 500 may be more accurately and currently characterized as a well-known quasi-technological benchmark. The US Bureau of Economic Analysis (Figure 1) shows the technology sector accounts for just 8.8% of GDP, yet the top 6 stocks in the index, all being technology, account for 27% of its portfolio importance.

Comparatively, during year-end 2017, the top 10 S&P 500 stocks were a diversified group accounting for 17% of the entire index value—today, the top ten securities for about one-third and is composed of a single sector–technology firms.

The current faster growth in many technology firms does not warrant its weighting. As we saw with Tesla shares, a top 5 S&P 500 firm only a few years ago, these shares can halve in value even though, as economic growth remains strong,  shares are generally rising.

Example: Nvidia’s stock price increase of only one day this quarter was about equal to the combined performance of two hundred S&P stocks!

Figure 1 Technology Sector in S&P 500 Gives Misleading Impression of US Economic Activity

 (figure sent to CT Capital Clients)

Because of the greater cost of equity (risk to adjusted cash flows) associated with technological companies, anticipated returns should consider a large depreciation of principle. Extreme volatility is inherent in the sector.

However, our diverse large capitalization value portfolios and the Russell 1000 Value Index have longer track performance records over a broader range of economic conditions and shifting industry trends, making them less vulnerable to the notable price volatility linked to a single sector. Conversely, as its complexion changed in very recent years, the S&P 500 became a general index oddity.

We display two large-cap value portfolios below (Tables 1 and 2). Their makeup differs significantly from that of the S&P 500 benchmark. Notably, those top heavy currently ruling the index are absent, except Microsoft, which logically has a more extended history.


Table 1 Wilshire 1000 Large Cap Value Portfolio Characteristics

(Table sent to CT Capital Clients)

Table 2 Russell 1000 TR Characteristics

(Table sent to CT Capital Clients)

Always remember that short-term financial results have a minimal impact on long-term value. In contrast, the consistency of multi-cycle growth in inflation-adjusted metrics found in a value portfolio such as CT Capital has a considerable influence and investor reward. That is the essence of a value-type portfolio and one not present in the current construction of the S&P 500 as has long been perceived.


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