Mind Your Money: Riding the waves of the diversified equity investments with confidence

Since hitting an all-time high on January 19 this year, the S&P 500 has recorded new intraday highs 30 more times

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Traders work on the floor at the New York Stock Exchange. On June 18, the S&P 500 reached a historic milestone, surpassing 5,487 points. — Reuters file

Published: Mon 1 Jul 2024, 5:14 PM

In 2022, the S&P 500 faced a significant decline of over 19 per cent, marking its most challenging year since the Great Recession of 2008. However, the index demonstrated remarkable resilience, rebounding in 2023 with a gain of over 24 per cent. As of mid-2024, it has continued this upward trajectory, showing an impressive increase of over 15 per cent.

The Standard and Poor’s 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices and includes approximately 80 per cent of the total market capitalisation of US public companies, with an aggregate market cap of more than $43 trillion as of January 2024. The S&P 500 index is a free-float weighted/capitalisation-weighted index. As of June 28, 2024, the nine largest companies on the list of S&P 500 companies accounted for 35.8 per cent of the market capitalisation of the index and were, in order of highest to lowest weighting: Microsoft, Nvidia, Apple, Amazon.com, Meta Platforms, Alphabet, Berkshire Hathaway, Eli Lilly and Company, and Broadcom. “

On June 18, the S&P 500 reached a historic milestone, surpassing 5,487 points. This achievement is undoubtedly a positive signal for investors in one of the market’s most critical indices. However, such substantial gains often lead to concerns about potential corrections.

Anticipating market movements

Since hitting an all-time high on January 19 this year, the S&P 500 has recorded new intraday highs 30 more times. This frequency of record highs is not unusual. In fact, since the 1980s, the S&P 500 has posted 40 or more new record highs in a single calendar year on nine occasions. Given the trend since January, this year could very well join that list.

The power of leading companies

While the S&P 500 comprises around 500 of the largest US companies, the significant gains this year are primarily driven by a select few, particularly in the tech sector. Year-to-date, the index has returned over 15 per cent, with approximately half of this growth attributed to the top 10 companies:

**Microsoft Corp (MSFT):** 7.28 per cent

**Apple Inc. (AAPL):** 6.56 per cent

**Nvidia Corp (NVDA):** 6.35 per cent

**Amazon.com Inc (AMZN):** 3.72 per cent

**Meta Platforms, Inc. Class A (META):** 2.39 per cent

**Alphabet Inc. Class A (GOOGL):** 2.30 per cent

**Alphabet Inc. Class C (GOOG):** 1.93 per cent

**Berkshire Hathaway Class B (BRK.B):** 1.64 per cent

**Eli Lilly & Co. (LLY):** 1.55 per cent

**Broadcom Inc. (AVGO):** 1.52 per cent

The “Magnificent Seven” including– Nvidia, Microsoft, and Apple – are particularly influential, collectively accounting for roughly 21 per cent of the entire index with a combined market cap of approximately $3.5 trillion.

Strategic advisory for market participation

From an advisory perspective, for the market to reach even greater heights in the latter half of the year, broader participation will be essential. Key events such as the upcoming elections, the timing of rate cuts, and indications of softening consumer demand could significantly impact the market’s trajectory.

Should these factors unfold unfavourably, increased volatility may ensue. While the past ten months have been marked by a relatively smooth market ascent, investors must recognise that such complacency cannot last indefinitely. Therefore, it is prudent to diversify into defensive value plays across sectors such as Utilities, Staples, Healthcare, and Telecom. These sectors can provide a hedge against potential market volatility or risks stemming from geopolitical events, elections, or misaligned global economic cycles and central bank policies.

Preparing for major market events

As we approach the end of a robust first half of the year, it is crucial for investors to focus on several significant market-shaping events in July. With the outlook for interest rates, inflation, and the broader economy still in flux, the coming month holds substantial implications for the market. As the new month begins, consider reassessing and repositioning your portfolio for optimal risk-adjusted gains.

Navigating highs and opportunities

Historically, stocks tend to climb higher and faster after reaching new highs. According to Fidelity Wealth Management, the S&P 500 averages a 12.7 per cent return in the 12 months following an all-time high, slightly above the 12.4 per cent average for other periods. Selling stocks at a new high could mean missing out on substantial returns.

Currently, the S&P 500 sits about 13 per cent above its January all-time high. While this may cause some investors to fear an imminent market peak, it’s essential to consider the broader historical context. Data from JPMorgan shows that investing at all-time highs between 1988 and 2020 yielded a total return of 50.4 per cent after three years and 78.9 per cent after five years, outperforming the average returns for the same periods.

The S&P 500’s recent performance underscores the importance of maintaining a well-informed and strategic approach to investing. By understanding market trends, recognising the influence of leading companies, and making informed investment choices, investors can navigate the highs and lows of the market with confidence, securing strong returns over the long term. Even near all-time highs, some stocks offer better value and potential returns than others. Identifying these opportunities can be challenging as stock prices rise, but it’s achievable in nearly any market environment.

For those hesitant to pick individual stocks, investing in a broad-based index fund that tracks the S&P 500 remains a sound strategy. Such funds offer diversification and the potential to benefit from the overall market’s performance, making them an excellent choice for building a resilient and profitable portfolio.

Disclaimer: The above is not an investment advice or any solicitation to buy/sell any of the above-mentioned securities, but only for educational purposes. Important to seek professional advice before investing.

Sandeep S. Jadwani - ACSI, CIB (Head of Investment Advisory, Habib Investment Limited – Regulated by DFSA) is qualified, experienced and an award-winning financial adviser to High Net-worth Individuals. Sandeep has been in the UAE for over 15 years and guiding individuals to efficiently and effectively manage their wealth to achieve their financial goals. Cnnect with him on Instagram @sandeep_investmentadvisor and Linkedin - www.linkedin.com/in/sandeepjadwanibestadvisoruae