View from the Observation Deck

The Energy Information Administration (EIA) reported that U.S. petroleum consumption averaged nearly 20.28 million barrels per day in 2022, an increase of almost 12% from average daily consumption in 2020, according to its own release. While many pundits predict that petroleum usage will decline over the long-term, oil was the most-consumed energy source in the U.S. on an annual basis in 2022. Today’s post contrasts the price of West Texas Intermediate (WTI) crude oil to the number of rotary drilling rigs (a proxy for supply) deployed in the U.S. on a weekly basis, over a two-year time frame.

• The price of WTI crude oil stood at $78.11 per barrel at the close of trading on 5/3/24 (end of chart), down 25.39% from its closing price of $104.69 on 4/29/22 (start of chart), according to data from Bloomberg.
  
  
• The average daily price of crude oil was $83.08 per barrel during the period captured in the chart. The highest and lowest closing prices were $122.11 and $66.74 per barrel on 6/8/22 and 3/17/23, respectively.
  
  
• For comparative purposes, the S&P 500 Energy and S&P 500 Indices posted average annual total returns of 15.17% and 13.13%, respectively over the same time frame. The top-performing energy subsector, of which there are five, was the S&P 500 Oil & Gas Refining & Marketing subsector, with an average annual total return of 34.76%.
  
  
• The number of active U.S. oil rigs declined from 552 on 4/29/22 to 499 on 5/3/24, according to data from Baker Hughes. The most recent high for the metric was 627 on 12/2/22.

Takeaway: On 5/3/24, the price of a barrel of WTI crude oil stood at $78.11 per barrel, 36.86% below its most recent high of $123.70 which occurred on 3/8/22, just a few weeks after Russia’s invasion of Ukraine. Remarkably, crude oil prices declined over this period despite sanctions against Russian oil and Hamas’s invasion of Israel. In our view, surging U.S. crude output has likely contributed to this phenomenon. The EIA reported that U.S. crude oil production and crude oil exports reached record highs of 12.9 and 4.1 million barrels per day, respectively, in 2023. The export figure is notable. Prior to 2020, the U.S. had been a net importer of crude oil going back as far as 1949. The rise in the relative value of the U.S. dollar may also be a contributing factor to the decline in crude oil prices over the past few years. From 3/8/22 through 5/3/24, the U.S. dollar rose by 6.02% against a basket of major foreign currencies, as measured by the U.S. Dollar Index (DXY).

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The S&P 500 Energy Index is a capitalization-weighted index comprised of 500 stocks representing the energy sector. The S&P 500 Energy Index is comprised of five subsectors.

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View from the Observation Deck

Dividend payments have been a key characteristic of most of the companies that comprise the S&P 500 Index (“Index”) for decades. As of 4/30/24, 404 of the 503 companies that comprise the Index paid a dividend. That figure is little changed from 1998, when 418 companies in the Index paid dividend distributions to shareholders. For today’s discussion, we set out to explain the fundamental relationship between dividends and earnings, and to determine if the recent record-high earnings in the Index have translated into higher yields.

The companies that comprise the Index distributed a record $588.2 billion in dividends in 2023, up 4.2% from $564.6 billion in 2022. Despite record distributions, the dividend yield of the S&P 500 Index has been trending downward (see chart). 

Companies will often increase their dividend distributions just enough to keep yields from falling as valuations increase. Over the 10-year period between 12/31/09 and 12/31/19, the Index posted an average annual total return of 13.54%. The Index’s yield fluctuated between 1.76% and 2.41% (2.01% on average) over the time frame. For comparison, the yield on the Index averaged 1.95% over the full period captured in today’s chart.

As of 5/3/24, the yield on the Index stood at just 1.39%.

As of 5/3/24, full-year earnings estimates for the Index were forecast to reach record levels of $244.67 and $277.47 in 2024 and 2025, respectively.

Given that dividends are paid from profits, a company’s ability to grow its earnings plays a crucial role in assessing its capacity to maintain (or grow) its dividend payout. From our perspective, the consistent, long-term pattern of earnings growth revealed in today’s chart, combined with the recent decline in the Index’s yield, could be a signal that the environment is ripe for dividend growth.

The S&P 500 Index’s dividend payout ratio is currently well-below average.

As many investors are likely aware, the dividend payout ratio measures the percentage of earnings that are paid to shareholders in the form of dividends. The Index’s dividend payout ratio stood at just 35.65% on 4/30/24. For context, the Index’s dividend payout ratio averaged 41.90% over the period captured in today’s chart.

Takeaway: Dividends have played an indispensable role in equity valuations for many decades. As noted above, the combination of low current yields, record-high earnings, and a below-average dividend payout ratio may be an indication that conditions are conducive to near-term dividend growth for the Index. That said, companies will be watching closely for evidence of an economic slowdown. Should weakness manifest, we expect they will likely hoard their cash rather than distribute it back to shareholders.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance.

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View from the Observation Deck

We update today’s table on a regular basis to provide insight into the variability of sector performance by market capitalization. As of the close on 4/30/24, the S&P 500 Index stood at 5,035.69, 4.16% below its all-time closing high of 5,254.35 set on 3/28/24, according to data from Bloomberg. The S&P MidCap 400 and S&P SmallCap 600 Indices stood 6.08% and 13.51% below their respective all-time highs as of the same date.

• Large-cap stocks, as represented by the S&P 500 Index, posted total returns of 6.04% on a year-to-date (YTD) basis thru 4/30/24, outperforming the S&P MidCap 400 and S&P SmallCap 600 indices, with total returns of 3.33% and -3.30%, respectively, over the period (see table).
• Sector performance can vary widely by market cap and have a significant impact on overall index returns. Two of the more extreme cases in 2023 were the Communication Services and Technology sectors. In 2024, the Communication Services, Information Technology, and Utilities sectors all exhibit significant variability in performance across market capitalizations.
• Communication Services and Energy stocks, the two top-performing sectors in the S&P 500 Index YTD, represented 9.1% and 4.1%, respectively, of the weight of the Index on 4/30/24. By comparison, those sectors represented 1.4% and 5.6% of the S&P MidCap 400 Index, and 2.8% and 5.0% of the S&P SmallCap 600 Index, respectively, as of the same date.
• As of the close on 4/30/24, the trailing 12-month price-to-earnings (P/E) ratios of the three indices in today’s table were as follows: S&P 500 Index P/E: 24.09; S&P MidCap 400 Index P/E: 18.66; S&P SmallCap 600 Index P/E: 17.92.

Takeaway: As evidenced by the variance in the total return of the Communication Services sector in today’s table, performance can vary widely across market capitalizations. The Utilities and Technology sectors reveal a similar trend, with total returns ranging from 16.04% to -5.87% and 12.07% to -8.61%, respectively. Notably, both the broader S&P 500 and S&P MidCap 400 Indices reached new all-time highs in March 2024, while the record high for the S&P SmallCap 600 Index occurred nearly three and a half years ago on 11/8/21. Combined, the SmallCap and MidCap Indices comprised just 8.1% of the total market capitalization of the S&P 1500 Index as of 4/30/24. The last time (pre-COVID) that small and mid-sized companies accounted for 8.1% or less of the S&P 1500 Index’s market capitalization was on 4/28/00. Since then, the S&P MidCap 400 and S&P SmallCap 600 Indices notched average annual total returns of 9.23% and 9.17% respectively (4/28/00 thru 4/30/24). For comparison, the average annual total return of the S&P 500 Index was 7.32% over the same period. While past performance is no guarantee of future results, it is our opinion that investors with the appropriate time horizons and risk profiles may benefit from exposure to small and mid-sized companies going forward.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The S&P MidCap 400 Index is a capitalization-weighted index that tracks the mid-range sector of the U.S. stock market. The S&P SmallCap 600 Index is a capitalization-weighted index that tracks U.S. stocks with a small market capitalization. The S&P 500 Equal Weighted Index is the equal-weight version of the S&P 500 Index. The 11 major sector indices are capitalization-weighted and comprised of S&P 500, S&P MidCap 400 and S&P SmallCap 600 constituents representing a specific sector.

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View from the Observation Deck

Companies have a number of ways in which to return capital to their shareholders. As the chart above shows, cash dividends and stock buybacks have been two of the more popular methods that corporations have utilized in recent years. Apart from Q3’22 and Q2’23, dividend distributions steadily increased over the period. For comparison, share buybacks remain well-below their peak set in Q1’22. Even so, buybacks were still a more significant source of overall capital disbursements than dividend distributions over the period in today’s chart.

• Total shareholders return of dividends and buybacks stood at $1.383 trillion in 2023, down from $1.487 trillion in 2022.
  
  
• In total, the companies that comprise the S&P 500 Index distributed a record $588.2 billion as dividends in 2023, up 4.2% from $564.6 billion in 2022.
  
  
• Dividend distributions increased on a quarterly basis in five of the quarters represented in today’s chart. 
  
  
• Stock buybacks stood at $795.1 billion in 2023, down from a record $922.7 billion in 2022.
  
  
• In 2023, the S&P 500 Index sectors that were most aggressive in repurchasing their stock were as follows (% of all stocks repurchased): Information Technology (24.9%); Financials (17.4%); and Communication Services (16.1%), according to S&P Dow Jones Indices.
  
  

Takeaway: Despite a brief contraction in Q2’23, both dividends and stock buybacks rebounded in the final two quarters of 2023. Dividend distributions were particularly strong, rising to a record $154.1 billion in Q4’23 and $588.2 billion for the 2023 calendar year. When ranked by total buyback expenditures, the top 20 companies accounted for 54.1% of all share buybacks in the quarter, according to Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices. For comparison, the historical average for the metric is 47.4%. In our view, the impact of the 1% excise tax levied on share repurchases beginning in 2022 has been muted. In 2023, the tax reduced operating earnings by just 0.40%, down from 0.51% in 2022.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. 

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View from the Observation Deck

Many investors are likely aware of the indispensable role dividends have played in S&P 500 total returns over time. In fact, dividends accounted for nearly 34% of the total return of the S&P 500 Index (“Index”) from 1940 to 2023. That said, we expect they are also aware of the impact of inflation over time. For today’s post, we set out to determine the extent to which dividend payments have outpaced inflation. The time frame we chose was the 45-year period from 1979 to 2023.

As revealed in the chart above, the dividends per share (DPS) paid by the companies that comprise the Index increased at a staggering pace when compared to the CPI-U.

Over the 45-year period covered by today’s data, the compound annual growth rate (CAGR) of the DPS paid by the companies that comprise the Index stood at 5.78%. For comparison, the CAGR of inflation, as measured by the CPI-U was just 3.13% over the same time frame.

Dividends paid by S&P 500 Index companies reached a record $588.23 billion (preliminary results) in 2023, representing an increase of 4.2% year-over-year from $564.57 billion in 2022, and up 28.9% from $456.31 billion in 2018. Furthermore, the dividend payout ratio for the Index stood at 36.77% on 12/29/23, well below its 30-year average of 45.75% (not in chart).

Despite record high dividend payments, the companies that comprise the Index are paying out a smaller portion of total earnings in the form of dividends than average. From our perspective, companies are more likely to increase or keep dividend distributions steady if earnings are growing. As of 4/19/24, Bloomberg forecast the Index would see earnings growth of 8.81% and 13.64% in 2024 and 2025, respectively.

Takeaway: From 1979 to 2023, the dividends per share paid by the companies that comprise the S&P 500 Index increased at a CAGR of 5.78%. For comparison, the Consumer Price Index for All Urban Consumers increased at a CAGR of 3.13% over the period. While the relationship between dividends and equity returns is generally well understood, we think the data presented today reveals that dividends have provided a powerful offset to inflationary pressures over time.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. Dividends per share is calculated by adding the gross dividend amounts for all dividend types that have gone ‘ex’ over the past 12 months based on dividend frequency. This total includes taxes, related dividend fees or tax related credits. The Consumer Price Index for All Urban Consumers reflects the cost of essential items such as food, apparel, housing, fuel, transportation, medical services, pharmaceuticals, and other products and services purchased for everyday living by nearly all urban residents, excluding those in rural areas, the military, and those in institutions, such as mental hospitals and prisons.

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View from the Observation Deck  

The old axiom in the stock market about selling your stocks at the close of April and then buying back in at the start of November once made some sense from a seasonality standpoint. When the U.S. was more of an industrialized economy it was common for plants and factories to close for a month or longer in the summer to retool and allow employees to vacation. The theory was that companies would conduct less commerce in that six-month span, which would likely translate into lower earnings. Today, due in large part to globalization, the world is far more interconnected and competitive, and there is less room for downtime, in our opinion.

• From 2004 through 2023, there were just three instances (2008, 2011 & 2022) in which the S&P 500 Index posted a negative total return from May through October, and the 2008 occurrence was during the financial crisis.
• The average total return for the S&P 500 Index for the May-October periods in the table was 3.37%, which is nothing to run from, in our opinion.
• Seventeen of the twenty top-performing sectors in the table posted total returns in excess of 10.00% (May-October). For comparative purposes, from 1926-2023 (98 years), the S&P 500 Index posted an average annual total return of 10.27%, according to Ibbotson & Associates/Morningstar.

Takeaway: We publish today’s table on an annual basis as a reminder to investors that not all market maxims should be taken at face value. In this case, the data presented does not support the notion that investors should “sell in May and go away”. Over the last 20 years, an investor who remained fully invested in the S&P 500 Index from May to October enjoyed an average annual total return of 3.37%, which is a significant figure when compounded. We continue to advocate that investors consider their time horizons and take risk as appropriate. For many, missing out on six months of equity market returns is a risk not worth taking, in our view.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance, while the 11 major S&P 500 Sector Indices are capitalization-weighted and comprised of S&P 500 companies representing a specific sector.

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View from the Observation Deck

Investors directing capital into U.S. mutual funds and exchange traded funds (ETFs) continued to favor passive investing over active management for the 12-month period ended 3/31/24.

Passive mutual funds and ETFs reported estimated net inflows totaling $620.78 billion for the 12-month period ended 3/31/24, while active funds reported estimated net outflows totaling $376.91 billion over the same period. The top three active categories with net inflows over the past 12 months were Taxable Bonds, Nontraditional Equity, and Alternative, with inflows of $77.38 billion, $20.47 billion, and $11.33 billion respectively (see table above). For comparison, the top three passive categories were U.S. Equity, Taxable Bond, and International Equity, with inflows of $323.17 billion, $217.13 billion, and $76.04 billion, respectively.

Despite compelling total returns in the broader equity markets, equity mutual funds and ETFs experienced net outflows over the past 12 months, while fixed income mutual funds and ETFs saw inflows.

Combined, the active and passive equity categories experienced outflows of $40.86 billion for the 12-month period ended 3/31/24. For comparison, the Taxable and Municipal Bond categories reported net inflows totaling $294.68 billion over the same time frame. The S&P 500, S&P MidCap 400, and S&P SmallCap 600 Indices posted total returns of 29.86%, 23.29%, and 15.83%, respectively, for the 12-month period ended 3/28/24, according to data from Bloomberg. With respect to foreign equities, the MSCI World (ex U.S.) and MSCI Emerging Market Indices posted total returns of 15.18% and 7.86%, respectively, over the same time frame.

Takeaway: Passive mutual funds and ETFs saw inflows of $620.78 billion compared to outflows of $376.91 billion for active funds over the trailing 12-month period ended 3/31/24. In the table above, we observe the largest disparity occurred in the U.S. Equity category, with active shedding $276.69 billion compared to inflows of $323.17 billion for passive funds. Notably, despite compelling total returns in the broader equity markets, equity funds suffered net outflows of $40.86 billion over the trailing 12-month period. For comparison, the fixed income categories saw combined net inflows of $294.68 billion over the same time frame. To view the last time we updated this post, please click here.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The S&P MidCap 400 Index is a capitalization-weighted index that tracks the mid-range sector of the U.S. stock market. The S&P SmallCap 600 Index is a capitalization-weighted index that tracks U.S. companies with a small market capitalization. The MSCI World (ex U.S.) Index is a free-float weighted index designed to measure the equity market performance of developed markets. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. 

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View from the Observation Deck
 
For today’s post, we compare the cumulative total returns of several utility and infrastructure-related indices to that of the S&P 500 Index between 10/12/22 (the start of the current bull market) and 4/5/24. Water plays a critical role in socio-economic development, the production of food and energy, and crucially, human survival itself. The United Nations reported that 2.2 billion people around the world lacked access to safely managed drinking water, and 3.5 billion did not have access to safely managed sanitation in 2022. As revealed in the chart, when it comes to an investment in infrastructure stocks, water stands out above them all. We discuss what we believe have been catalysts to growth for the companies involved in water utility, infrastructure, materials, and equipment below.

• In the U.S., an estimated 2 million people currently live without running water inside their homes. While most U.S. citizens have access to clean water and sanitation, the infrastructure that provides these services is aging. The pipe that makes up the U.S. water network is 45 years old, on average. Some of the oldest cast iron pipes still in use were put in service more than 100 years ago, according to McKinsey & Company.
  
  
• The U.S. drinking water infrastructure is comprised of 2.2 million miles of underground pipe, according to the American Society of Civil Engineers (ASCE). The ASCE noted that an estimated 6 billion gallons of treated potable water is lost through leaks in this piping infrastructure each day. In the U.S., more than 12,000 miles of water pipes were planned to be replaced by drinking water utilities in 2020. The U.S. Environmental Protection Agency (EPA) expects water-pipe replacement rates to peak in 2035, with somewhere between 16,000 to 20,000 miles of piping being replaced per year.
  
  
• Funding for updated water infrastructure has accelerated in recent years. In 2021, the U.S. government revealed legislation that designated $55 billion toward water infrastructure improvements. Fifteen billion dollars of that funding was set aside to replace each of the 9.2 million lead service lines still in use, by 2031. In November 2023, the World Bank reported that $1.37 trillion in additional investments are needed to reach the United Nation’s Sustainable Development Goal for global access to clean water and sanitation by 2030.
  
  
• The cumulative total returns of each of the indices in today’s chart were as follows: S&P 500 Index (49.00%), S&P Global Water Index (38.20%), S&P Global Infrastructure Index (23.20%), ISE Global Wind Energy Index (8.97%), S&P Global Clean Energy Index (-21.44%), and the MAC Global Solar Energy Index (-35.21%).

Takeaway: From our perspective, the results in today’s chart can be explained by the crucial role that access to clean water and proper sanitation play in developed and developing nations around the world. Globally, an estimated $1.37 trillion of additional water infrastructure investments are required to provide clean water to the 2.2 billion people currently in need of it by 2030. In the U.S., our aging water infrastructure is in dire need of repair and replacement, with 6 billion gallons of treated water being lost each day to leaks in the current framework (approximately 14%-18% of U.S. daily water usage). Additionally, population growth threatens to stress these systems even further. Given the critical nature of the water ecosystem in comparison to the other infrastructure investments shown in today’s chart, we do not find the sector’s outperformance overly surprising. While there is no way to be certain, we expect these companies will continue to benefit from the global construction and domestic modernization of water infrastructure.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The S&P Global Water Index is comprised of approximately 50 companies from around the world that are involved in water related businesses. The Global Infrastructure Index is comprised of 75 companies from three distinct infrastructure clusters: Utilities, Transportation, and Energy. The ISE Global Wind Energy Index is a quintile-based modified capitalization weighted index tracking public companies that are active in the wind energy industry. The S&P Global Clean Energy Index is an index of approximately 100 companies involved in global clean energy-related businesses. The MAC Global Solar Energy Index tracks globally-listed public companies that specialize in providing solar energy products and services.

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Our next blog post will be April 18th.

View from the Observation Deck  

Today's blog post illustrates the wide disparities that often exist between the annual price performance of an ounce of gold bullion, silver, and the equity returns posted by mining companies. Since precious metals tend to be priced in U.S. dollars, we also included a column that tracks the relative strength of the U.S. dollar against a basket of other major currencies.

• Precious metals have historically been considered potential inflation hedges by investors. From 1926-2023, the 12-month rate of change on the Consumer Price Index (CPI) averaged 3.0%, according to data from the Bureau of Labor Statistics. It stood at 3.2% at the end of February 2024, down from its most-recent high of 9.1% set in June 2022, but up from its most recent low of 3.0% in June 2023.
• The price of gold has been trending upward. The spot price of one ounce of gold stood at a record $2,261.00 on 4/2/24, an increase of 9.13% on a year-to-date (YTD) basis according to data from Bloomberg.
• The spot price of silver also increased over the same time frame. The spot price of one ounce of silver rose by 9.86% on a YTD basis thru 4/2/24. That said, unlike gold, the spot price of silver has not recovered to its all-time high. The price of one ounce of silver stood at $26.14 on 4/2/24, 47.14% below its all-time high of $49.45 set on 1/18/80.
• In 2023, the spot price of the U.S. dollar index peaked at $107.00 on 10/3/23 before falling to $100.99 on 12/27/23. Since then, the index increased by 3.79% to $104.82 as of 4/2/23. 
• From 2009 through 2023, the Philadelphia Stock Exchange Gold & Silver Index posted a positive total return in seven of the 15 calendar years. Five of them occurred from 2016 through 2023. It is in positive territory YTD. 

Takeaway: In some ways the data presented today defied our expectations. If the CPI is down 5.9 percentage points from its most-recent high, then why is it that gold is setting record highs, silver is rebounding, and the U.S. dollar is closing in on its 2023 calendar year high? From our perspective, there are several catalysts at play here. First, many investors view the U.S. dollar, gold, silver, and other precious metals as safe havens during times of turmoil. The wars between Russia/Ukraine and Hamas/Israel, as well as terrorist attacks in the Red Sea pose geopolitical risks that may be leading investors to seek refuge in these assets. Additionally, despite recent disinflation, the CPI remains well-above the Federal Reserve’s (“Fed”) target rate of 2.0%, even increasing from 3.1% in January 2024 to 3.2% in February. Other inflation metrics reveal a similar trend. The Fed’s “Core” (excludes food and energy) and “Supercore” (services only (no goods), excluding food, energy, and housing) inflation metrics rose by 2.8% and 3.3% on a y-o-y basis in February 2024, according to Brian Wesbury, Chief Economist at First Trust Portfolios L.P. Should geopolitical risk and inflation remain elevated or worsen, we expect higher valuations will occur within these safe haven assets.

The chart and performance data referenced are for illustrative purposes only and not indicative of any actual investment. The index performance data excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. There can be no assurance that any of the projections cited will occur. The Philadelphia Stock Exchange Gold & Silver Index is a capitalization-weighted index comprised of the leading companies involved in the mining of gold and silver. The U.S. Dollar Index (DXY) indicates the general international value of the dollar relative to a basket of major world currencies. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

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View from the Observation Deck

One of the most common questions we field on an ongoing basis is the following: What are your favorite sectors? Today’s blog post is one that we update on a quarterly basis to lend context to our responses. Sometimes the answer is more evident than at other times, and sometimes it only makes sense via hindsight. While the above chart does not contain yearly data, only two sectors in the S&P 500 Index have been the top-performer in back-to-back calendar years since 2005. Information Technology was the first, posting the highest total return in 2019 (+50.29%) and 2020 (43.89%). Energy was the second, posting the highest total return in 2021 (54.39%) and 2022 (65.43%), according to data from Bloomberg.

• The top-performing sectors and their total returns in Q1’24 were as follows: Communication Services (15.82%), Energy (13.69%), and Technology (12.69%). The total return for the S&P 500 Index was 10.55% over the period. The other eight sectors generated total returns ranging from 12.45% (Financials) to -0.55% (Real Estate).
• By comparison, the top-performing sectors and their total returns in Q1’23 were as follows: Technology (21.82%), Communication Services (20.50%), and Consumer Discretionary (16.05%). The worst-performing sectors for the period were: Health Care (-4.31%), Energy (-4.71%), and Financials (-5.56%).
• Advancements in Artificial Intelligence (AI) continue to be a catalyst to the S&P 500 Communication Services and Information Technology Indices in 2024. At 49.76% and 46.01%, respectively, the trailing 12-month total returns for the Communication Services and Information Technology Indices were the highest of the eleven sectors that comprise the S&P 500 Index through the end of March 2024. For comparison, the total return of the S&P 500 Index was 29.86% over the same time frame. Each of the eleven major sectors that comprise the S&P 500 Index were positive on a total return basis over the period.
• Click here to access the post featuring the top-performing sectors in Q2’22, Q3'22, Q4'22 and Q1’23.

Takeaway: As we can observe from today’s chart, the top-performing sector often varies from quarter to quarter. Of the eleven sectors that make up the S&P 500 Index, the Communication Services and Information Technology Indices boast the highest total returns on a trailing 12-month basis (49.76% and 46.01%, respectively). Even so, they have only claimed the top spot in two of the last four quarters. That said, developments in AI continue to bolster revenue expectations for these companies. On March 29, 2024, data from Bloomberg revealed that revenues for the companies that comprise the S&P 500 Technology and Communication Services Indices are forecast to grow by 9.30% and 7.32%, respectively, in 2024. The figures represent the highest year-over-year revenue growth estimate of the eleven sectors that comprise the broader S&P 500 Index. Revenue growth estimates for the S&P 500 Health Care Index, which is notably absent from today’s chart, came in third at 6.64%. Will a different sector rise to the top in the second quarter of 2024? We look forward to seeing what the data reveals.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. The respective S&P 500 Sector Indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector.  

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