Happy New Year, everyone. I’m Liz Ann Sonders and this is January’s Market Snapshot, during which I’ll take a look back at the year that just finished in terms of market performance. Obviously, it was a banner year, but the fuller story can be told by digging a bit under the surface of the major indexes because 2024 represented a bit of a tail of multiple markets.
[Table for Large caps boosted index returns for 2024 Market performance is displayed]
So the S&P 500 was up more than 23% last year. As you could see, that was bested by both the NASDAQ, which was up nearly 29%, and the NASDAQ 100, up nearly 25%. Now, those gains were boosted by the Magnificent 7 group of stocks, up nearly 67%, along with a handful of other mega-cap stocks. Now, that Magnificent 7 group includes Nvidia, Meta, Tesla, Amazon, Alphabet, Apple, and Microsoft, and that performance left the S&P equal-weight and also the Russell 2000 Index of small-cap stocks pretty much in the dust, albeit with pretty respectable gains of more than 10%.
Now, there are multiple explanations for the year’s bias up the size spectrum, including stronger earnings growth by that cohort, strong exchange-traded fund flows, and less sensitivity in terms of larger companies to higher long-term treasury yields, and that’s amid a less dovish Federal Reserve.
[High/low chart for Back-to-back >20% gains for S&P 500 annual % change is displayed]
Now, last year was the second consecutive year with the S&P 500 gaining more than 20%.
[Gray circle highlighting 2023 and 2024 is displayed]
As you can see here, that was the first occurrence of its kind since the late 1990s, actually, when we had quite a few strong years in a row.
[High/low chart for Mega caps ruled past two years for S&P 500 minus S&P 500 Equal Weight annual % change is displayed]
Last year was also the second consecutive year of outperformance by the capitalization-weighted S&P 500 relative to the equal-weighted version of that same index.
[Gray circle highlighting 2023 and 2024 is displayed]
Again, we have to go back to the late 1990s to see a time during which the cap-weighted index outperformed the equal-weighted version to a similar degree.
[High/low chart for Large caps ruled past four years for S&P 500 minus Russell 2000 annual % change is displayed]
Now, another way to highlight the large-cap bias within equities last year is to compare S&P 500 ……………….returns to the Russell 2000 Index of small-cap stocks.
[Gray circle highlighting 2021, 2022, 2023 and 2024 is displayed]
Last year was the fourth consecutive year during which the S&P 500 outperformed the Russell 2000, with two of those years showing a spread of more than 10 percentage points.
[Table for Paltry % of stocks outperformed for % of S&P 500 members outperforming S&P 500 Index is displayed]
Now, let’s look at this mega-cap bias through another lens. It’s an old adage on Wall Street about market breadth, in that the market is strongest when the soldiers and not just the generals are at the front line. It’s on this note that one can quibble with just how strong performance has actually been when you look below the surface of the cap-weighted indexes. By the end of last year, by the way, the 10 largest stocks within the S&P 500 had grown to a 39% weight within the index. That’s the second record high last year, and it was a record high by far, again twice in 2024.
Now, as shown here, for the full calendar year 2024, less than 20% of stocks within the overall index outperformed the index. Shorter lookback timeframes did improve, notably with 40% of stocks within the S&P 500 Index having outperformed in the final four months of last year, but obviously that’s still south of the halfway point.
[Table for Fuller performance story for Major indexes and maximum drawdowns is displayed]
Let’s look at this concentration problem yet another way. The table here makes it on my X and LinkedIn feeds every morning. It shows index returns for the last year, including the returns from the year-to-date lows, and each index’s maximum drawdowns throughout the course of the year.
[Red box highlighting Average member maximum drawdown from 2024 high is displayed]
But the final column is perhaps most interesting, as it tracks the average index member maximum drawdown during the year. All three indexes actually showed bear market level declines based on that measurement. Now, those declines occurred throughout the year. It was via a process of churn and rotation, not weakness all at once, while mega-cap outperformance kept the cap-weighted index returns in very healthy territory.
Now, the bias up the capitalization spectrum continues to pressure professional active equity managers, especially those benchmarked against the S&P 500 on a quarterly basis. But here’s where a public service announcement is perhaps warranted for individual investors. They’re generally not playing this quarterly performance against a benchmark game, and groups of stocks like the Magnificent 7 and other mega-cap stocks, they do represent an outsized contribution to overall S&P 500 returns. However, they have not been the best price performers. Their higher contribution weight is courtesy of the multiplier of their cap size. Case in point, of the 10 best 2024 performers within the S&P 500, only one is in the Magnificent 7, and of the 10 best 2024 performers within the NASDAQ, not a single one is in the Magnificent 7.
[Multi color quilt chart for 2024’s sector mosaic for 11 GICS sectors and S&P 500 is displayed]
Now, mega-cap dominance was evident at the sector level as well, but it was amid a lot of month-to-month volatility. This visual here is what we call our sector quilt, and it shows each of the 11 S&P 500 sectors, along with the index itself, each color coded.
[One-year column is displayed]
Now, here is the full-year ranking from best to worst, with what we refer to as the growth trio of communication services, technology and consumer discretionary topping the performance charts. Those, by the way, are the three sectors represented by the Magnificent 7.
[Yellow arrows for Comm Serv sector are displayed]
But let’s take a closer look at the path the top two performing sectors took throughout the course of the year, starting with the best, communication services. Again, it ended the year on top with a gain of nearly 40%. However, the course it charted throughout the year was extremely volatile in terms of monthly performance rankings.
[Yellow arrows for Info Tech sector are displayed]
There was a similar path for technology, which gained more than 35% last year at the sector level, but took a fairly wild ride along the way to stellar year-end performance.
[List of Takeaways is displayed]
Now, to sum it up, 2024 was another year of mega-cap dominance from several angles. The cap-weighted index in the case of the S&P 500 had a great year. The three sectors housing the Magnificent 7 led the performance derby from a sector perspective, but there was more weakness and churn and rotation under the surface of the cap-weighted indexes, and a heck of a lot of sector volatility throughout the course of the year. And we expect more of that type of under the surface volatility to persist this year.
For more on our outlook for 2025, please see our formal report, which was posted last month, and could be found within the Learn tab on schwab.com. That’s it for this month. Thank you, as always, for tuning in, and I’ll be back with another installment in February.
[Disclosures and Definitions are displayed]
