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What’s Driving U.S. Stock Market Returns?

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The following content is sponsored by New York Life Investments
What's Driving U.S. Stock Market Returns?

What’s Driving U.S. Stock Market Returns?

In many ways, U.S. stock market returns in 2023 have defied expectations. Strong U.S. economic activity, a robust labor market, and consumer spending have helped spur investor optimism. Year-to-date, the S&P 500 is up roughly 12%.

Given this unexpected strength, the above graphic, sponsored by New York Life Investments, explores key factors fueling stock market returns in 2023.

Market Breadth

Generally speaking, the concept of market breadth shows how many stocks are participating in the rise or fall of an index.

Wider Breadth: More stocks are rising, often indicating lower risk as gains are widespread.
Narrower Breadth: Fewer stocks are rising, potentially presenting higher risk as gains have a steep impact on the index.

Earlier in 2023, just seven stocks drove virtually all of the S&P 500’s returns. By July, the top 10 companies made up 34% of its gains. Here’s how S&P 500 market breadth compares to historical trends:

YearPercent of Stocks Outperforming the
S&P 500 Index
2023*25%
202257%
202148%
202033%
201946%
201845%
201743%
201651%
201547%
201452%
201352%
201247%
201148%
201058%
200959%
200849%
200745%
200649%
200551%
200457%
200354%
200261%
200167%
200063%
199931%
199829%
199742%
199642%
199540%

Source: Bloomberg Finance LP, 06/20/2023. *Data as of June 12, 2023.

While market breadth has been very narrow so far this year, the good news is that it has improved with gains spreading across a growing number of sectors.

Top S&P 500 Sectors

In 2023, the following sectors are driving market returns. Number have been rounded:

S&P 500 SectorYTD Return5-Year Annualized Return
Communication Services+44%+8%
Information Technology+43%+19%
Consumer Discretionary+33%+8%
Industrials+10%+7%
S&P 500 Index+18%+9%

Source: S&P Global, 08/31/2023.

Big tech stocks have powered the market’s rise, supported by the AI frenzy. Additionally, strong consumer spending has helped lift the Consumer Discretionary sector.

Overall, we can see the top three performing sectors are cyclical, meaning they rise and fall with the business cycle.

Corporate Earnings

Even with many companies beating earnings expectations, year-over-year S&P 500 profits declined 5.2% in Q2 2023, its worst performance since 2020.

Below, we show how earnings growth breaks down by sector. Numbers have been rounded.

S&P 500 SectorYear-over-Year Earnings Growth Q2 2023
Consumer Discretionary+52%
Communication Services+19%
Industrials+12%
Real Estate+10%
Financials+6%
Consumer Staples+6%
Utilities+5%
Information Technology+1%
Health Care-28%
Materials-29%
Energy-51%
S&P 500 Index-5%

Source: FactSet, 08/04/2023.

As of Q2 2023, over half of S&P 500 companies reported positive year-over-year earnings growth. Furthermore, corporate net profit margins remain strong at 11.5%, despite falling from record highs in 2021.

While corporate profitability is slowing, better-than-expected earnings are supporting stock market performance.

Stock Market Returns: A Balanced View

Today, improving market breadth and sturdy corporate earnings across key sectors are supporting the market’s strength.

These factors, along with a solid macroeconomic backdrop, are leading to a brighter economic outlook in the coming year. As a result, investors see a higher likelihood of the economy achieving a soft landing.

In an ever-changing environment, it highlights the importance of working with a financial professional who can provide their clients with actionable and balanced strategies and help them stay on track as they navigate today’s market.

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