Estimated Returns by Sectors, Industry Groups and Industries
Large cap stocks, as measured by the Lark Research Large Cap index (the “Index”) which currently mirrors the S&P 500, turned in another impressive performance in 2021. The Index posted a price return of 26.8%, much better than 2020’s solid 16.9% return.
The year was noteworthy in several respects. First, 2020’s three worst performing sectors, Energy, Real Estate and Finance, were the three top performers in 2021. The Energy sector reversed 2020’s shocking loss of 36.9% to post a 45.8% gain in 2021. Real Estate reversed its modest loss of 5.4% to deliver a 42.3% return. Finance turned around a 3.9% loss with a 33.4% gain.
Utilities, the only other sector to record a loss in 2020 with a decline of 2.8%, earned 13.5% in 2021, but it was the worst performing sector, underperforming the Index by 13.3 percentage points (pp).
The Information Technology sector once again made the largest contribution to the Index’s performance. Its 2021 price return of 32.9% accounted for 9.0 pp of the Index’s 26.8% return. In 2020, Technology’s 42.2% gain accounted for 9.7 pp of the Index’s 16.9% return. Technology now represents 28.6% of the Index’s market capitalization, up from 27.4% in 2020 and 23.0% in 2019.
Mega-cap stocks also were major contributors to the Index’s performance. In 2020, Alphabet (GOOGL), Amazon (AMZN) Apple (AAPL), Facebook (FB) and Microsoft (MSFT) achieved returns ranging from 31% to 81% and together accounted for 9.6 pp of the Index’s 16.9% advance. Collectively, they accounted for 17.4% of the Index’s market capitalization at December 31, 2019.
Although I still think of these five as technology companies, only two are classified as such. Google and Facebook (now Meta Systems) are part of the Communication Services sector; while Amazon resides in the Consumer Discretionary sector.
In 2021, the composition of the top five contributors changed. Meta Systems and Amazon were outdistanced by Nvidia (NVDA) and Tesla (TSLA). Nvidia, which accounts for less than 1% of the Index’s market cap, posted a return of 125.3% in 2021. Tesla, on the heels of its seven-fold advance in 2020, delivered a 49.8% return in 2021. Meta Systems slipped a notch to become the sixth largest contributor. Amazon fell from second place to 42nd, as its return dropped from 76.3% in 2020 to 2.4% in 2021.
The stock market’s performance in 2020 was affected by the big sell-off at the start of the pandemic and the rapid recovery that ensued. There was greater uncertainty then about the long-term negative impact of the pandemic on the business prospects of a wide range of companies. Although the market quickly identified those companies that were not likely to be hurt by (or in fact would benefit from) the pandemic, many more stocks were left either for dead (i.e. energy) or in purgatory. Strip out the technology sector and the three mega caps – GOOGL, FB and AMZN – that reside in other sectors – and the remaining 423 stocks in the Index earned a combined, market weighted return of just 3.0% in 2020.
In contrast, 2021 was a year of broader-based recovery (even though a large number of stocks still underperformed significantly). Excluding technology and three of the top-performing mega-caps that reside elsewhere (i.e. GOOGL, FB and TSLA), the remaining 430 stocks earned a combined market-weighted return of 14.0%, much better than 2020’s 3.0%.
Yet, there was a noticeable disparity in performance within industry groups and industries. In many cases, only a few stocks with outsized returns (in excess of 30%) drove industry performance. The remaining stocks significantly underperformed. 118 or 23% of the 511 stocks in the Index had price returns of less than 5%. 76 had negative returns. Although it is clear that 2021 was a year of broader recovery, many stocks were still left behind. To a great degree, that reflects the ongoing impact of restrictions put in place during the pandemic that are likely to be lifted during the course of this year.
This is a brief introduction to my report, “Large Cap Stocks Analysis and Outlook: 2021 Estimated Returns by Sectors, Industry Groups and Industries,” published on February 2, 2022. Reach out to me to receive a copy of the full report.
February 2, 2022
Stephen P. Percoco
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