S&P 500 Stocks Underperformed the Index by a Record Amount in 2023 During the 'Weirdest Bull Market in Decades'.

As 2023 approaches its conclusion, the S&P 500 index is on the brink of achieving a new historical high. However, for those engaged in stock selection, a disconcerting trend emerges: a substantial number of the index's constituents are lagging far behind their peak values from January 2022.

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This has given rise to a notable dichotomy in the U.S. market, creating what Callie Cox of eToro has aptly characterized as "the weirdest-looking bull [market] in decades." Analysts such as Torsten Slok from Apollo and Cox have been diligently monitoring the underperformance of S&P 500 members relative to the index. In a recent commentary, Slok highlighted that, currently, 72% of S&P 500 components are underperforming, indicating a trajectory toward a record underperformance in 2023.

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This divergence in performance is not a recent development; the phenomenon of "bad breadth" in the U.S. stock market has been a prominent topic on Wall Street throughout the year. Concerns have been voiced by many analysts who fear that the U.S. market has become excessively top-heavy. This imbalance is attributed to a small cluster of mega-cap stocks, famously dubbed "the Magnificent Seven" by CNBC's Jim Cramer and a cadre of analysts. These stocks, including Apple Inc., Nvidia Corp., Tesla Inc., Amazon.com Inc., Microsoft Corp., Alphabet Inc., and Meta Platforms Inc., have been the primary drivers of the index's gains, propelled by the surge in artificial intelligence.

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The consequence of this skewed performance is evident in the significant outperformance of the S&P 500 compared to its equal-weight counterpart. So far this year, the S&P 500 has outpaced its equal-weight sibling by over 12 percentage points. As of Wednesday morning in New York, the S&P 500 had surged by 24.4% in 2023, reaching a level of 4,777, just shy of its record closing value on January 3, 2022. In contrast, the Invesco S&P 500 Equal Weight ETF, tracking the equal-weight index, registered a more modest increase of 11.8% at $158.07 per share.

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Notably, the Equal Weight ETF, RSP, is on the cusp of a "golden cross" as its 50-day moving average approaches its 200-day moving average. This development is attributed to a narrowing of the performance gap among market laggards, with traders factoring in the anticipation of multiple Federal Reserve interest-rate cuts in 2024.

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The Nasdaq-100 has experienced even more robust performance, surging over 54% in 2023, according to FactSet data. As the year concludes, the market grapples with this peculiar scenario, characterized by the stark divergence between the high-performing entities driving the S&P 500 to new highs and the substantial number of constituents struggling to reclaim their pre-2022 peaks.