AI Frenzy Keeps Market Leadership Narrow

Michael E. Schroer, CFA


Shrugging off mixed economic signals, disarray among regional banks, and rising interest rates, the S&P 500® Index grinded higher over the first five months of the year.

A surprisingly small number of stocks has accounted for most of the gain in the S&P 500 Index, however. The table below shows the performance of the S&P 500 by economic sector, with 8 of the 11 sectors actually posting year-to-date losses through the end of May. The technology, communications services, and consumer discretionary sectors were the largest contributors to the S&P 500 on a cap weighted basis, which rose 9.3% over the last five months. Yet, the same index on an equal weighted basis of -1.2% over the period revealed the substantial contribution that mega cap stocks made to the overall cap weighted index return.

Changes in Price and Price-to-Earnings by Sector1
12/31/2022 Through 5/31/2023
AI Frenzy

Data ending 5/31/2023
Source: FactSet

In recent weeks, market momentum has been dominated by stocks with a perceived connection to the development of artificial intelligence (AI) applications. While the potential for AI-related products and services is significant, the recent frenzy for AI-related stocks is somewhat reminiscent of investor enthusiasm for digital currencies several years ago and, more distantly, the tech bubble of the late 1990s. (NVIDIA, a manufacturer of semiconductors that can be used in AI applications, now sells for 36x revenues and 123x trailing earnings.)

The fourth column of the table shows the change in the sector P/E ratio from the beginning of the year through the end of May. Contributing to their strong performance, the technology, communications services, and consumer discretionary sectors have all seen significant increases in their P/E ratios, while most of the other sectors have seen smaller gains or even declines in their P/Es. Notably, the P/E of the cap-weighted S&P 500 has risen, while the P/E of the equal weighted index is virtually unchanged from the beginning of the year. This suggests that good opportunities continue to exist among stocks below the mega caps in terms of size.

While technology remains the largest sector weighting in our Large Cap Growth portfolio, we continue to find good opportunities in the health care, industrials, and financials sectors as well. We believe that diversification beyond the largest stocks in the index will likely prove to be rewarding going forward.

1 Price/Earnings based on Next-Twelve-Months Earnings
2 The weights of Microsoft, Apple and NVIDIA are over 50% of the XLK ETF
3 The weights of Alphabet and Meta are over 50% of the XLC ETF
4 The weights of Amazon and Tesla are over 40% of the XLY ETF


Past performance is not a guarantee of future results.


This Market Update reflects the thoughts of Renaissance as of May 31, 2023. This information has been provided by Renaissance Investment Management. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment making decision, nor should it be considered a recommendation. The views and opinions expressed are those of the Chief Investment Officer at the time of publication and are subject to change. There is no guarantee that these views will come to pass. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.


If Renaissance or benchmark performance is shown, it represents historically achieved results, and is no guarantee of future performance. Future investments may be made under materially different economic conditions, in different securities, and using different investment strategies and these differences may have a significant effect on the results portrayed. Each of these material market or economic conditions may or may not be repeated. Therefore, there may be sharp differences between the benchmark or Renaissance performance shown and the actual performance results achieved by any particular client. Benchmark results are shown for comparison purposes only. The benchmark presented represents unmanaged portfolios whose characteristics differ from the composite portfolios; however, they tend to represent the investment environment existing during the time periods shown. The benchmark cannot be invested in directly. The returns of the benchmark do not include any transaction costs, management fees, or other costs. The holdings of the client portfolios in our composites may differ significantly from the securities that comprise the benchmark shown. The benchmark has been selected to represent what Renaissance believes is an appropriate benchmark with which to compare the composite performance.


The value of an investment may fall as well as rise. Please note that different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Investor principal is not guaranteed and investors may not receive the full amount of their investment at the time of sale if asset values have fallen. No assurance can be given that an investor will not lose invested capital. Consultants supplied with these performance results are advised to use this data in accordance with SEC guidelines. The actual performance achieved by a client portfolio may be affected by a variety of factors, including the initial balance of the account, the timing and amount of any additions to or withdrawals from the portfolio, changes made to the account to reflect the specific investment needs or preferences of the client, durations and timing of participation as a RIM client, and a client portfolio’s risk tolerance, investment objectives, and investment time horizon. All investments carry a certain degree of risk, including the loss of principal, and are not guaranteed by the U.S. government.


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Michael E. Schroer, CFA


PUBLISHED: June 12th, 2023
4 Min Read

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