In an article last Thursday entitled “4 Stocks Have Driven U.S. Equity Gains In 2020“, I noted that the then +5.9% total return of the U.S.-focused S&P Total Market Index (ITOT) was driven by the very strong returns of just four large cap stocks – Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), and Tesla (TSLA). Collectively, these four stocks contributed all of the gross return for a broad based gauge of U.S. stocks. The rest of the U.S. equity market – totaling almost 3,700 stocks – could be viewed as down, on average, when excluding these four outperformers.
We know that the gains in the United States have been driven by the largest capitalization stocks and disproportionately in the tech sector. Two other stats from the aforementioned article bore that depiction of returns out. First, the median return – roughly the return of the 1850th ranked stock out of 3,700 – was -12.4% on the year. The median stock is doing much worse than the weighted average mean, which gives greater weight to the large cap giants. Second, the Tech sector, which has had an average weight of nearly 25% in 2020 in this broad equity market gauge, was up more than 25% on the year at the time of that article, a contribution to the total return of 6.26% versus the total index return of 5.93%. Said differently, the Tech sector had contributed all of the gains in 2020 and every other sector is cumulatively down, on average, for the year.
For the full year through Friday’s close, a broad-based gauge of U.S. stocks is now up about 4% and a broad-based gauge of global stocks is down about 4%. To be specific, the S&P Total Market Index (ITOT) is up 4.1% in 2020, and the MSCI All Country World Index ex-US (ACWX) is down 3.6% for the year.
If equity market gains in the United States have been disproportionately driven by the performance of megacaps, particularly in the tech sector, let’s look outside the United States and see how much the impact of these megacaps is influencing U.S. outpeformance versus the rest of the world.
The chart above shows the top ten return drivers for the U.S.-based S&P Total Market Index, and the global MSCI All-Country World Index (ex-US). The ten stocks with the highest return contribution to the U.S. index have contributed a positive 7.58% to 2020 returns. Conversely, the top ten global stocks have contributed a positive 3.08% to 2020 returns. The U.S. is outperforming the global index by 7.64%, and roughly 4.5% of this outperformance would be just from among the top ten stocks in these two indices. While these two indices combine for more than 5,500 stocks, the outperformance of the top 10 U.S. stocks versus the top 10 global stocks has driven much of the performance differential between the two indices.
While not all of the top ten U.S. stocks are in the tech sector – Amazon and Tesla are in Consumer Discretionary, and Facebook (FB), Alphabet (GOOGL), and Netflix (NFLX) are in Communications – they all benefit from the tech-like halo that has boosted stock performance in this e-commerce, remote work world in 2020. Largely the same could be said for the global list. Only pharma company Roche and food and beverage company Nestle are among the top ten contributors to global, ex-US performance.
Subtract the top 10 contributors to U.S. performance – these tech-influenced stalwarts – and U.S. returns drop to -4% in 2020. Subtract the top 10 contributors to global ex-US performance and returns drop to around -7%. Exclude these top performers and U.S. returns in 2020 are negative, and the performance differential with the rest of the globe largely dissipates.
I hope this article illustrates for readers a key driver of U.S. outperformance, and the impact of a small number of stocks on U.S. and global returns. My view is that the tech outperformance that has powered U.S. stocks will have a hard time persisting. In a broadening recovery driven by a widening economic re-opening, value-based laggards may play catch-up. In a stalled economic recovery, defensive stocks may regain traction against the tech growth stocks that have seen some level of spending pulled forward in the e-commerce/remote work driven world. This look at the top performance drivers inside and outside the U.S. highlight’s tech’s dominance this year, a trend that is unlikely to persist indefinitely.
Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties, and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.
Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.