Op-Ed: The S&P 500, capitalism’s only color is green

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As you know by now, we began a series of columns to educate investors during these trying times of increased market uncertainty, high volatility, and double-digit downturns. We have discussed the Dow Jones Industrial Average and the NASDAQ Composite, and today it’s the S&P 500’s turn.

The S&P 500 index established in 1957 includes the 500 largest companies in the United States that list in the Dow Jones, and the Nasdaq Composite. These companies vary across many sectors. The S&P 500 has become one of the most critical indices globally as it broadly traces how the United States stock market is performing. 

The S&P 500 top 11 companies with more than 1.25% weight in the index:

  1.   Apple Inc. (AAPL)                              6.60%  
  2.   Microsoft Corp. (MSFT)                    5.82%  
  3.   Amazon Inc. (AMZN)                         2.87%  
  4.   Alphabet Inc. (GOOGL)                     1.92%  
  5.   Tesla Inc. (TSLA)                               1.81%  
  6.   Alphabet Inc. (GOOG)                       1.78%  
  7.   Berkshire Hathaway Inc. (BRK.B)     1.66%  
  8.   UnitedHealth Group Inc. (UNH)        1.36%  
  9.   Johnson & Johnson (JNJ)                  1.36%  
  10.   NVIDIA Corp. (NVDA)                     1.34%  
  11.   Meta Platforms Inc. (FB)                   1.28%

The S&P 500 has representation in every sector of the economy divided into three main categories:

  1. Cyclical                                                29.25%
    1. Basic Materials                       2.49%
    2. Consumer Cyclical                   10.60%
    3. Financial Services                    13.37%
    4. Real Estate                              2.79%
  2. Sensitive.                                            46.25%
    1. Communication Services        8.72%
    2. Energy.                                       4.84%
    3. Industrials                                  8.21%
    4. Technology                                24.48%
  3. Defensive                                            24.50%
    1. Consumer Defensive               6.92%
    2. Healthcare                              14.58%
    3. Utilities                                    3.00%

Which way is up?

The S&P 500 reached its all-time high of 4,786.56 on January 3, 2022, and has seen a series of volatile steep declines falling as low as 3,900. 79 on May 19, 2022, decreasing 885.77 points or 18.64%. However, following seven weeks of steady declines, the longest one since 2001, during last week’s rally, it rose to 4,158.24, rising 256.88 points or 6.58%. The U.S. economy is in much better shape than the market selloff leads many to believe. The selloff abated last week by largely positive earnings reports from a large swat of retailers, and the somewhat less dovish Fed allowed the S&P to come back from its lowest point in the last twelve months.  

While some continue talking about a recession, we oppose that view as the broad signs of growth continue at a slower pace, and we do not see the expansion ending anytime soon. As we said before, emotional behavior and panic selling took the markets drastically to their lows, and now the available data confirms that the pessimistic view was too extreme.  

When we review the 488 S&P 500 companies that have reported 1Q22 earnings, we note the following: 

  • 77.5% of the companies that reported did so above analyst expectations which compares favorably to the long-term average of 66%, a 17.42% increase.
  • The growth estimate is 5.1%%; when the energy sector is included, the growth rate for the index is 11.2%.
  • The revenue growth projection is 13.9% for 1Q22.

The S&P 500 has had notable periods in which a U.S. recession took it down more significant than 40%, and that includes the years 1974, 2002, and the great financial crisis of 2009

  • Did you know that the S&P 500 fell for 12 years from 1969 to 1981 due to the U.S. stagnant economic growth and high inflation? 
  • During the 2008 great financial crisis, the S&P 500 fell 46.13% and, by March 2013, had recovered all of its losses by March 2013.
  • During the height of the pandemic in 2020, the S&P 500 fell close to 20% and recovered to close the year up 18.40%.

As we consider the rise and fall of the S&P 500, let’s review the yearly returns from 2015 to YTD 2022:

  • 2015: 1.38%
  • 2016: 11.96%
  • 2017: 21.83%
  • 2018: -4.38%
  • 2019: 31.49%
  • 2020: 18.40%
  • 2021: 25.71%
  • 2022 YTD: -13.31%
Author Francisco Rodríguez-Castro is president of Birling Capital.

As you review these results, consider that the last five-year return reached 13.49%, and the 10-year returns reached 14.41%. 

Moreover, understanding well the S&P 500 and its behavior could help you obtain significant returns when you add the S&P 500 to your diversified portfolio of stocks; some notable Index funds or ETFs include:

  • Schwab S&P 500 Index Fund (SWPPX): YTD return -12.22%, three year return 15.64%
  • iShares Core S&P 500 (IVV)YTD return of -12.24% and three-year return of 15.62%
  • SPDR Portfolio S&P 500 ETF (SPLG)YTD return of -12.20% and three-year return of 15.64%
  • Vanguard S&P 500 ETF (VOO) return of -12.26% and three-year return of 15.41%
  • SPDR S&P 500 ETF (SPY) return of -12.30% and three-year return of 15.56%

As the investor base has broadened with more and more liquidity entering the markets, understanding the S&P 500 and its dynamics will serve you well as the S&P 500 is a direct reflection of the U.S. economy.

My critical advice is that “Capitalism knows only one color: that color is green. Become an opportunistic investor, and your greens will blossom.”

This story was written by our staff based on a press release.