It's back-to-school season for my kids, which has me thinking about grades and such – not for individual companies this time, but for the whole "class" of the S&P 500, and which kid is actually earning the valedictorian spot. Here's the thing about a class average: if you only looked at the overall GPA for the class of 500, you'd think everybody did pretty well and pretty evenly. They didn't. Some kids are carrying the curve.
Largest Contributors
Through the middle of August, the "average stock" in the index – the S&P 500 Equal Weight Index, where all 500 companies count the same regardless of size – is up right around 13% for the year. Solid. A respectable B+. The S&P 500 itself, the cap-weighted version most of us watch, is up closer to 14%. Not a huge gap on paper, BUT that gap hides a much bigger story.
The Honor Roll (top 5): Sandisk, leading the class two years running and up over 650% - not a typo. Dell over 270%, Micron and Seagate, up somewhere around 250%, Western Digital over 200%! All companies are riding the same memory-chip wave.
The Ones Who Might Need Summer School (bottom 5, roughly): Intuit, down somewhere around 55-60%, the class's biggest disappointment. Adobe, Salesforce, and Workday, all nearing 40% declines. CoStar Group, down more than half.
Notice the pattern? EVERY honor-roll name is a chip or hardware company riding the AI build-out. EVERY name on the other list is software or consulting – the "knowledge work" the market is currently betting AI might replace. This isn't really 500 individual report cards; it's one big test on whether you are the company potentially doing the replacing or you're the company possibly getting replaced.
Valuations & Concentration
Is the class "smart" or "expensive"? Depends which kid you're grading. The valedictorians up front trade at rich multiples; the median student, away from the front row, looks far closer to historical norms. And the 10 largest companies in the S&P 500 now make up somewhere around 40% of the entire index's value – ten kids out of five hundred carrying 40% of the group grade.
Let me be clear: I don't think this is the dot-com class of 1999 running on hope and a Super Bowl ad budget. Today's biggest "students" are, for the most part, genuinely profitable, not just popular. But smart and expensive aren't mutually exclusive.
Several members of our firm, including myself, were fortunate enough to catch David Kelly, JPMorgan Asset Management's Chief Global Strategist, speak at a conference last week. His view: the U.S. economy is merely "OK" for regular Americans right now, BUT it's a great environment for the stock market, thanks largely to AI-driven capital spending. He also flagged meaningful "concentration risk" – his worry is that whenever the next bear market shows up, it'll likely be centered on whichever sector currently has the most hype, and right now that's obviously AI. Add in sky-high valuations, political noise, and ongoing geopolitical risk, and his advice boiled down to something value investors like us appreciate - stay invested but get more selective and more diversified underneath the index level.
This is exactly why our approach doesn't change with the report cards: we're long-term minded, and we're always looking to buy good companies at good prices, not just the names topping this semester's honor roll. Good students are still out there in the middle of the class, just not the ones getting called up on stage.
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Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All indices are unmanaged and may not be invested into directly. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All investing involves risk, including possible loss of principal.
