The S&P 500 Index continues to trend higher as the benchmark’s year-to-date total return as of May 31 is nearly 10%. A more thorough analysis reveals a highly narrow leadership of stocks in the S&P 500 Index this year. Only a handful of heavily weighted stocks are responsible for propelling the index higher, making the upward movement much more fragile than it appears. Just ten stocks are responsible for +104% of the gains in the S&P 500 rally so far this year. More than 100% is possible because the average market-weighted return of the remaining 490+ stocks in the S&P 500 Index is net negative. This phenomenon exacerbates the performance disparity between the market-cap-weighted S&P 500 and Equal Weight Index. Year-to-date through May 31, this annual difference reached its second-highest level in over 30 years.

Another concern is that small and mid-cap companies, represented by the Russell 2000 and Russell Mid-Cap Indices, have fallen -0.04% and -0.29% respectively, year-to-date through May 31. The rapidly rising interest rate environment has disproportionally negatively impacted the profitability of small and medium-sized companies. These companies tend to have more debt, which becomes more expensive when interest rates increase. According to Strategas, the long-term average for non-earning companies in the Russell 2000 Index is 28%. The current reading at the end of May was 43%, approaching its highest level since 1990, which peaked at 49%.

There is also a significant performance disparity in international markets. Developed international stocks continue to outperform emerging markets widely. The year-to-date performance of the MSCI EAFE Index is up 8.8% compared to the MSCI EM Index’s performance of 2.5%.

The Fed’s next meeting is June 13-14, when investors will examine the committee’s guidance on future interest rate decisions. The market’s implied Federal Funds rate remains noticeably different from the Fed’s expectations in December 2023. The market believes the Fed will need to cut interest rates more than the Fed is currently forecasting.

While the timing of those cuts are uncertain, stock market risk has declined significantly. The VIX measures stock market volatility and currently sits at its lowest level since early 2020.

The views expressed herein are exclusively those of Meeder Investment Management, Inc., are not offered as investment advice, and should not be construed as a recommendation regarding the suitability of any investment product or strategy for an individual’s particular needs. Investment in securities entails risk, including loss of principal. Asset allocation and diversification do not assure a profit or protect against loss. There can be no assurance that any investment strategy will achieve its objectives, generate positive returns, or avoid losses.

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