US stock market in 2023: the most profitable companies rise the most

Posted on 2023-10-27

Much of the global stock market surge in 2023 came from the U.S. stock market, but many U.S. stock market investors don't seem to be sharing in the upside. This section will begin with a thorough assessment of the U.S. stock market (levels and equity risk premiums) before delving into the winners and losers of the year.

In the first half of 2023, the S&P 500 had a strong first half, up 15.91 per cent, while the Nasdaq, with its focus on tech stocks, realised a return of almost double that, at 31.73 per cent.

One reason for the rise in equity prices, at least in general, is that fears of runaway inflation or a deep recession have been subdued, and the decline in such fears can be seen in the equity risk premium, which is illustrated in the chart below, which shows estimates of expected returns on equities and the implied equity risk premium for the first six months ending in 2022 and 2023:

The expected return on equities (cost of equity) rose from 5.75 per cent to 9.82 per cent in 2022, the largest one-year increase in history. 2023 has been more subdued, with expected returns having fallen back to 8.81 per cent, and in the process the implied equity risk premium has peaked at 5.94 per cent at the start of 2023, before falling back to 5 per cent in mid-2023.

Despite the decline, the equity risk premium remains roughly at its average since 2008 and significantly above its average since 1960. If the essence of a bubble is that the equity risk premium becomes "too low", then, at least for the time being, these figures do not appear to be a sign of a bubble (unlike in 1999, when the equity risk premium fell to 2 per cent).


The difference between the performance of the S&P 500 and the Nasdaq this year provides clues as to which sectors will benefit the most this year.

Dividing all U.S. stocks into sectors shows that four of the 12 sectors have negative returns in 2023, energy stocks are down more than 17% this year, and the biggest winners are tech stocks, whose 43% return in 2023 almost completely makes up for their losses in 2022.

On top of that, financials were flat this year, as was real estate, due to the bankruptcies of Silicon Valley Bank and First Republic Bank. Communication services and non-essential consumer goods were strong in the first half of 2023, but are still more than 20 per cent below their pre-2022 levels.


A list of the ten worst- and best-performing segments based on market capitalisation changes in the first half of 2023 reveals that the worst performers were oilfield service companies, financial services and energy; the best-performing sector was autos and trucks, with Tesla as the big winner accounting for a large portion of the sector's market capitalisation growth.

Semiconductors, computers/peripherals and software also performed better, not only in terms of percentage growth, but also in terms of absolute value change, with market capitalisations exceeding a trillion dollars.


Breaking companies down into deciles based on their market capitalisation at the start of 2023, and then breaking stocks down into profit and loss companies based on their net earnings in 2022, shows that the largest decile of money-making companies by market capitalisation accounted for almost all of the gains in the market capitalisation of all U.S. stocks.

In the first six months of 2023, the market capitalisation of these large money-making companies increased by $5.3 trillion, with the seven large technology companies (Apple, Microsoft, Nvidia, Amazon, Tesla, Facebook and Google) adding a combined $4.14 trillion to their market capitalisation, accounting for 97.2 per cent and 80 per cent, respectively, of the $5.45 trillion increase in the value of all US equities.


Value investing, represented by low PE and low PB stocks, has lagged behind growth investing over the past decade, with high-growth stocks delivering much higher returns than old-time value stocks (low PE, high dividend yields, etc.).

In 2022, old-time value investors feel vindicated because the losses in 2022 were inflicted on high-growth stocks, especially in the tech sector.

However, the situation reverses again in 2023, with the familiar pattern of the past decade returning, and high PB stocks again delivering significantly higher returns than low PB stocks: in terms of price-to-book ratios, almost all of the value added in the US stock market in 2023 comes from stocks in the top two deciles.

The back and forth between value and growth investing in the win/lose column in 2023 leads me to believe that this pattern will continue to play out over the next decade with no decisive winners.




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