Large-Cap Stocks Keep the S&P 500 Afloat (2024)

Major Moves

Stock indexes are incredibly useful tools because they give us a big-picture view into what the market as a whole is doing at any moment. However, indexes can also obscure some information by averaging it out with a lot of other information.

For example, most traders like to watch the to get a sense for whether the stock market is currently bullish or bearish. But because of the way the S&P 500 is constructed, we aren't actually getting a view of the entire market by looking at it. We're primarily getting a view of how some of the biggest stocks on Wall Street are performing.

You see, the S&P 500 is a market-cap weighted index. That means that, the larger the market cap of the stock, the greater the impact the movement of that stock is going to have on the index.

Currently, the largest stock in the S&P 500 is Microsoft Corporation (MSFT), with a market cap of $973.39 billion. At the other end of the spectrum, the smallest stock in the index is Fossil Group, Inc. (FOSL), with a market cap of only $582.75 million. Because of this difference in size, when Microsoft makes a bit move, the S&P 500 moves a lot, but when Fossil Group makes a big move, the index barely reacts.

To combat this imbalance in impact, analysts have created an equal-weighted version of the S&P 500 that gives every stock in the index the same opportunity to affect the value of the index. You can track this index using the Invesco S&P 500 Equal Weight ETF (RSP).

So what happens when you compare the performance of the standard S&P 500 index – using the SPDR S&P 500 ETF (SPY), in this case – with the performance of the RSP in a relative strength chart? You can see whether the price movement of the standard S&P 500 is being driven primarily by the larger-cap stocks in the index or by a broad mix of stocks in the index.

If the SPY/RSP relative strength chart is moving higher, it tells you that SPY is outperforming RSP, which means large-cap stocks are driving the majority of the gains. If the SPY/RSP relative strength chart is moving lower, it tells you that RSP is outperforming SPY, which means a broad mix of stocks are driving the gains.

Looking at the SPY/RSP comparison chart below, you can see that SPY has been outperforming RSP during most of 2019. This tells me that I need to keep an eye on the largest-cap stocks in the index to see where the market is going to go next.

Here are the top 10 stocks by market cap in the S&P 500:

S&P 500

The S&P 500 paused in Friday's session. It drifted a little higher for a while and then drifted a little lower before settling out right in the middle of its trading range for the day.

Spinning top dojis, like the one that was formed today, don't give us much insight into where the market is going next, but the fact that the S&P 500 remained above support at 2,816.94 is promising

Read more:

Investigating the Effectiveness of Equal-Weight ETFs

Introduction to Fundamentally Weighted Index Investing

Large-Cap Stocks Keep the S&P 500 Afloat (2)

Risk Indicators – Margin Debt

I'm always looking for confirmation of trader sentiment on Wall Street. If I can confirm that traders are bullish, I feel more confident in my bullish outlook. Conversely, if I can confirm that traders are bearish, I feel more confident in my bearish outlook. After all, traders drive prices.

One of my favorite ways to see just how bullish traders are is to look at how much money traders are borrowing to buy the stocks they are trading. Traders can borrow up to 50% of the purchase price of a stock – according to Regulation T of the Federal Reserve Board. So if a stock costs $100, you only have to use $50 of your own money to purchase the stock. You can borrow the other $50.

Borrowing money to buy stocks is referred to as buying on margin, and the amount of money you have borrowed to buy stock is called "margin debt." Tracking the total amount of margin debt being used to buy stocks can give you a good sense of how confident traders are. Confident traders tend to borrow more. Nervous traders tend to borrow less.

Margin debt climbed to an all-time high of $668,940,000,000 in May 2018. It then began to stabilize in mid-2018. By the latter part of 2018, margin debt started to retreat, falling to 607,645,000,000 in October and then reaching its recent low of 554,285,000,000 in December 2018. Since December 2018, margin debt levels have been climbing. Margin debt has rebounded to 588,721,000,000 as of April – according to recently released data from FINRA.

FINRA releases its margin debt data a month after the fact. That's why we are just now seeing the data for April. We'll have to wait until the last week in June to see May's data. Even so, the increase in borrowing to buy stocks confirms that traders are becoming increasingly confident. This is a promising sign for the S&P 500.

Read more:

FINRA: How It Protects Investors

How Much Can I Borrow With a Margin Account?

Large-Cap Stocks Keep the S&P 500 Afloat (3)

Bottom Line - Enjoy the Holiday Weekend

The U.S. financial markets will be closed on Monday in observance of Memorial Day. That means you don't have to worry about your stocks moving up or down. Enjoy your holiday!

Read more:

Why Bull Market Could Rise Over 25% in 2019 Despite Trade War

Why Alibaba Is a New Threat to Amazon

Learn the Basics of Investing

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Large-Cap Stocks Keep the S&P 500 Afloat (2024)

FAQs

Is the S&P 500 mostly large-cap stocks? ›

The S&P 500 is considered the benchmark for the U.S. stock market, even though it focuses exclusively on the large-cap market. This index tracks the performance of the 500 largest U.S. publicly traded companies across 11 different sectors.

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Why are large-cap stocks stable? ›

Due to their size of operations, large-cap companies are better-equipped to ride out challenging economic conditions compared to smaller-cap companies. As a result of these features, the share prices of large-cap companies tend to be relatively more resilient than smaller-cap stocks.

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What is the 10 year return of the S&P 500? ›

Stock Market Average Yearly Return for the Last 10 Years

The historical average yearly return of the S&P 500 is 12.68% over the last 10 years, as of the end of February 2024. This assumes dividends are reinvested. Adjusted for inflation, the 10-year average stock market return (including dividends) is 9.56%.

What is the difference between large-cap and sp500? ›

Large-cap companies are those that have a market capitalization of over $10 billion. The S&P 500 measures the overall risk, return, and performance of the large-cap equities market.

Is the S&P 500 diversified enough? ›

Is Investing in the S&P 500 Less Risky Than Buying a Single Stock? Generally, yes. The S&P 500 is considered well-diversified by sector, which means it includes stocks in all major areas, including technology and consumer discretionary—meaning declines in some sectors may be offset by gains in other sectors.

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Is it better to invest in large-cap stocks? ›

Large-cap stocks are generally considered to be safer investments than their mid- and small-cap stock counterparts because they are larger, more established companies with a proven track record. Some of the biggest names in business are large-cap stocks – Apple, Microsoft and Alphabet, for example.

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How risky are large-cap stocks? ›

When investors select their stocks, they must decide between risk and reward. Large-cap stocks usually belong to large, established companies and are safer investments than small- or mid-cap stocks.

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Are large-cap stocks good for long term? ›

Long-term growth: While offering lower potential returns than mid-cap and small-cap funds, large-cap funds can still provide consistent long-term growth over time. This is due to the established track record and stability of the companies they invest in."

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What are the disadvantages of large-cap companies? ›

Low Capital Appreciation

While these stocks can provide stability and dividend income, they might not offer the same level of capital appreciation as smaller, more growth-oriented stocks. This can be a drawback for investors looking to maximize their returns, especially over shorter investment horizons.

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Does 401k double every 7 years? ›

One of those tools is known as the Rule 72. For example, let's say you have saved $50,000 and your 401(k) holdings historically has a rate of return of 8%. 72 divided by 8 equals 9 years until your investment is estimated to double to $100,000.

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Where will S and P be in 5 years? ›

They point to the fact that the US economy is expected to grow at a slower pace in the coming years and that interest rates are likely to rise. As a result, they expect the S&P 500 to grow by an average of 5-7% per year over the next five years.

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Is it better to invest in mid-cap or large-cap? ›

Mid-caps are slightly riskier than large-cap stocks and less risky than small-cap stocks. Small-cap stocks are riskier than the other two. Despite the risk, these stocks have great growth potential. Large-cap funds are usually less volatile unless there is some news.

Should I invest more in large-cap or mid-cap? ›

If she is a conservative investor and is unwilling to take on much risk, then large caps are advisable. She must only consider investing in mid and small caps if she is willing to take high risk to earn higher returns and has a longer investment horizon, so as not to be tormented with the short-term volatility.

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Should I invest in large-cap or mid-cap? ›

Large caps tend to be more mature companies, and so are less volatile during rough markets as investors fly to quality and become more risk-averse. Shares of small caps and midcaps may be more affordable for investors than large caps, but smaller stocks also tend to have greater price volatility.

Is S&P small-cap or large-cap? ›

The S&P 500 is used for large cap. Russell MidCap is used for mid cap. Russell 2000 is used for small cap. All data are as of January 19, 2024.

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Is the S&P 500 a large-cap fund? ›

Advantages of a large-cap growth portfolio

The S&P 500 Index is the benchmark even though it only focuses mainly on the large-cap market.

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What is the cap size of the sp500? ›

The S&P 500 has a market capitalization of $41.982 trillion dollars. The total market cap is calculated by summing the market capitalization of every company in the index. Each company's calculated market cap is based on the outstanding float share count.

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How much of the S&P 500 is mid-cap? ›

The average value of a company in the index is over $86 billion. That's not to say that the S&P 500 doesn't include some relatively smaller companies. According to Morningstar, 13% of the fund is invested in mid-cap companies. The S&P 500 index is considered a “blend” fund.

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