2022 Large Cap Performance Analysis

Large cap stocks, as measured by the Lark Research Large Cap Index (the “Index”)[1] which mirrors the S&P 500, posted a decline of 19.5% in 2022.  As in previous years, most of the performance was driven by a handful of stocks.  In 2022, those stocks – Alphabet (GOOG, GOOGL), Apple (AAPL), Amazon (AMZN), Meta Systems (META), Microsoft (MSFT), NVIDIA (NVDA) and Tesla (TSLA) – registered a combined loss of 40.2%, dominating (or skewing) the performance of the entire Index.

With a total combined market capitalization of $12.0 trillion at the start of the year, those seven stocks represented 28% of the Index’s total market cap.  Consequently, they accounted for 11.3 percentage points (PP) of the Index’s 19.5% decline.  Excluding those stocks, the rest of the Index posted a decline of 11.5%, contributing 8.2 PP to the Index’s 19.5% loss. That is still significant, but it is more indicative of a correction than a bear market.

The relative contribution of the seven stocks is especially noteworthy when considering two-year returns. The Index posted a significant gain of 26.8% in 2021, followed by a loss of 19.5% in 2022.  Excluding the contribution of the seven stocks, the Index’s price return was 21.4% in 2021 followed by a loss of 11.5% in 2022.  Over the two-year period, the Index’s total price return was 2.1%; but excluding the seven stocks, it was 7.4%.  Thus, investors would have realized a higher return – 5.1 PP – with lower volatility by holding the Index without those seven stocks.

Of course, those seven megacap stocks have delivered significant returns for their shareholders over long periods of time; so I am not advocating avoiding them.  Yet, it seems to me that the market ignored their high valuations when it was driving those stocks higher in 2021 which made them more vulnerable to a sharp pullback in the face of the Federal Reserve’s tightening of monetary policy.

Impact on Sector Performance.  Those seven stocks also had a major impact on the performance of their three sectors: Communication Services, Consumer Discretionary and Information Technology.  Yet, the performance of the remaining stocks in those sectors was generally poor, so those sectors still posted significant double-digit losses for the year, without the seven.  Still, by excluding those seven stocks, those sectors’ weight in the performance of the Index declines and the weight of other sectors that posted less consequential losses (or the gain for Energy) increases, which reduces the loss in the overall adjusted Index.

Communication Services recorded a loss of 40.9% in 2022, but excluding GOOG and META, which accounted for 62.7% of the sector’s market capitalization, the remaining stocks still logged a combined decline of 30.1%. Without them, the contribution of Communication Services to the Index’s loss drops from 4.4 PP to 1.2 PP.

Consumer Discretionary posted a loss of 37.9%, but excluding AMZN and TSLA, the loss was a more modest 20.8%.  Excluding AMZN and TSLA, the weight of Consumer Discretionary in the total Index decreases from 13.1% to 6.6% and the contribution of the sector to the Index’s total 2022 loss drops from 5.0 PP to 1.4 PP.

Major Themes.  One theme for the year was the compression of valuation multiples caused by rising interest rates.  That was most vividly observable in the 40% plunge in the seven mega caps, but it also affected growth-oriented sectors, like Technology and certain sub-industries within many other sectors, like Communication Services, Healthcare and Industrials.

This was also a decidedly “risk-off” year.  Except for Energy, which was the only sector to post a gain (a whopping 59.2%), defensive sectors outperformed, with Utilities (down 1.0%), Healthcare (down 2.8%) and Consumer Staples (down 3.3%) leading the way.

Real Estate, which is sensitive to interest rates and to the economic outlook, also underperformed, with a price decline of 28.3%.

Besides multiple compression, the Communication Services sector was hurt by disappointing financial performance and concerns about the outlook for media and entertainment stocks.

It may not be fitting to draw conclusions about the performance of any sector or sub-industry just by looking at its overall price return.  In several instances, such as Healthcare and Industrials, sector performance reflects a wide dispersion in sub-industry returns, making the composite performance of the sector misleading.  Likewise, some sub-industries have only one or two constituents; so their returns are really about the performance of individual stocks rather than representative of an industry trend.

[1]   A description of the methodology employed in calculating Index returns is provided in the report.

This is an excerpt from my recent analysis of the 2022 performance of large capitalization stocks. For a copy of the full report, please reach out to me using the contact information provided below.

January 24, 2023

Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250

© 2015-2024 by Stephen P. Percoco, Lark Research.   All rights reserved.

This blog post (as with all posts on this website) represents the opinion of Lark Research based upon its own independent research and supporting information obtained from various sources. Although Lark Research believes these sources to be reliable, it has not independently confirmed their accuracy. Consequently, this blog post may contain errors and omissions. Furthermore, this blog post is a summary of a recent report published on this subject and that report provides a more complete discussion and assessment of the risks and opportunities of any investment securities discussed herein. No representation or warranty is expressed or implied by the publication of this blog post. This blog post is for informational purposes only and shall not be construed as investment advice that meets the specific needs of any investor. Investors should, in consultation with their financial advisers, determine the suitability of the post’s recommendations, if any, to their own specific circumstances. Lark Research is not registered as an investment adviser with the Securities and Exchange Commission, pursuant to exemptions provided in the Investment Company Act of 1940. This blog post remains the property of Lark Research and may not be reproduced, copied or similarly disseminated, in whole or in part, without its prior written consent.

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