With the S&P500 recently topping 4200 and registering +9% gains for the year, there has been both disdain and a belittling of this accomplishment from some investors due to the fact that most of the heavy lifting has been done by technology stocks. Within the S&P500, there exists a “tale of two cities”, with price gains unevenly distributed. As of last week, the performance of 7 companies, including Amazon, Microsoft, Alphabet, Tesla, Meta, and Nvidia had an average return of +44% for 2023, whereas the remaining 493 companies in the S&P500 earned only +1%.

For some investors, this concentration of returns has left the market in an unsustainable overbought condition; And in fear of a pullback in these “top stocks,” some have remained on the sidelines. Although we would undoubtedly prefer a market with all sectors rising, we do not discount the recent surge in technology stocks as somehow invalidating the index’s move higher. After all, we did not hear the opposite cries of an oversold market when losses were concentrated in technology stocks during the 2022 bear market. Markets do not always rise in concert with one another; rather, they rotate between outperformers and underperformers, and by design, an index passively captures these rotations. Validating or invalidating index movements by cherry-picking sectors to include or exclude can be done to argue any side with little insight gained. Should we feel better about the S&P493 by excluding the performance of financial and regional bank stocks? Should we discount the TSX’s outperformance in 2022 by excluding the returns from the energy sector? I advise to not play that game and focus our efforts on tactical asset and sector allocation.

This is not to say that a pullback in technology stocks to drag down the overall markets could not occur. There are technology stocks whose momentum indicators (RSI) are flashing a highly overbought signal. Yet these stock-specific corrections, unless backed by a deterioration of corporate fundamentals, may be a routine reversion to allow the stock to “breathe” and allows those who missed the run to build their positions.  Ultimately, we submit to investors that the decision to invest should depend on the major themes that have more structural impact on markets. This includes inflation, interest rates, and corporate earnings. In May, we felt particularly constructive for long-term investing with the rate of upward EPS estimate returning back to positive territory. At 51% on its four-week average for both current and next year’s earnings, there have been more positive than negative revisions to EPS forecasts.

Take time to review with your advisor the respective trends in inflation, earnings, and interest rate forecasts. Investing in 2023 has proven to require both patience and the willingness to make tactical allocations. Although the “top 7” names in the S&P500 have captured everyone’s imagination, we would submit that the underperformance of the remaining 493 also deserves one’s attention.