The S&P 500 has been on fire lately. From a low of 3,583 just two years ago, the US blue-chip index has surged to 5,841 (as I write). That’s a mind-boggling gain of 63% in just 24 months!
I’d be over the moon to get that from a single stock, never mind a large-cap index.
What’s going on?
A number of factors have come together to produce this stellar performance, including the avoidance of a US recession and the anticipation of falling interest rates.
However, the fuel on the fire has been the rise of generative artificial intelligence (AI) following the launch of ChatGPT in November 2022. This triggered a tidal wave of capital expenditure from the giant cloud platforms, as they feared being left behind in potentially the biggest tech revolution since the internet.
Chipmaker Nvidia has been the big winner, with its share price rocketing around 1,000% in two years. As one analyst put it last year: “There’s a war going on out there in AI, and Nvidia today is the only arms dealer.”
In September, it was reported that Nvidia alone had accounted for approximately 25% of the S&P 500’s year-to-date gains!
The hypothetical gains
So, what if I’d stuck 10 grand into the S&P 500 index five years ago? Well, assuming it was the popular Vanguard S&P 500 ETF (LSE: VUSA), then my return would have been around 108%. That’s with dividends.
So, I’d have £20,800 (not including fees), which would be an incredible return. However, it’s worth remembering this is well above the historical average of around 10.7% per year.
A handful of giants
Given the speed of this rise, I think there are things to consider. Many S&P 500 stocks are pricey and could be due for a sharp pullback, particularly if the forthcoming US election ends in a contested outcome.
Plus, there’s a high level of concentration at the top of the index. Here are the Vanguard ETF’s 10 largest holdings, as of 30 September.
| Percentage of fund | |
|---|---|
| Apple | 7.18% |
| Microsoft | 6.48% |
| Nvidia | 6.06% |
| Amazon | 3.53% |
| Meta Platforms | 2.54% |
| Alphabet (Class A) | 1.97% |
| Berkshire Hathaway | 1.71% |
| Alphabet (Class C) | 1.63% |
| Broadcom | 1.63% |
| Tesla | 1.47% |
The top 10 comprise around 34% of the total. This very high concentration is due to the largest companies dominating the index with their mammoth market caps.
Where next?
Earlier this month, strategists at Goldman Sachs raised their target on the index to 6,000 by December (2.7% higher). I note this was their fourth increased adjustment since last year, so price forecasts are always worth taking with a healthy bucket of salt, in my opinion.
However, it does indicate that most of Wall Street remains upbeat. Perhaps that’s not surprising, given that the average S&P 500 bull market has tended to run for around five years, and we’ve only just entered the third year of the current one.
Of course, history’s no reliable indicator of what’s to come.
My preferred alternatives
I don’t have an S&P 500 ETF in my portfolio. If I wanted to invest in one though, I’d probably go for an equal-weighted version that gets regularly rebalanced.
This means the fund allocates the same weight to each stock, regardless of company size, providing broader diversification and reducing concentration risk.
Another option could be the iShares MSCI USA Quality Factor ETF. This focuses on a sub-set of high-quality US stocks with strong and stable earnings. Incredibly, it’s even outperformed the S&P 500 in recent years!
