Unusually, the FTSE 100‘s been faring better than the S&P 500 so far this year. US stocks were up 3.66% in the beginning of January – enough to generate a £366 return on a £10,000 investment.
That’s not bad, but the FTSE 100’s up 5.66% in the same time. It’s unusual to see UK stocks faring better than their US counterparts, but the question for investors is, how long it can last?
What’s been happening?
It might be a bit of a surprise to see the FTSE 100 outperforming the S&P 500. Especially when the US index has Palantir in it, which is up 46% since the start of January.
The FTSE 100 has nothing that’s up that much this year. But there’s a big reason why the success of Palantir – and some other stocks generating similar results – hasn’t pulled the S&P 500 higher.
The stock only accounts for around 0.5% of the overall index, so a 46% move higher in the share price translates into a shift of less than 0.23% for the S&P 500.
By contrast, over 7% of the index is accounted for by Apple (NASDAQ:AAPL). And the stock, down 4.36% since the start of the year, is more than enough to offset the gains from Palantir.
Diversification
The issue’s actually worse than this.The seven biggest companies (by market-cap) make up around a third of the US index, but they’re also very similar businesses.
A prominent theme over the last week has been the stock market reacting negatively to companies proposing heavy investments in artificial intelligence (AI). And that’s an issue for the S&P 500.
This has been the case with Alphabet, Amazon, and Microsoft, which collectively make up around 15% of the index. When those stocks fall together, it’s hard for anything to offset this.
The usual reason for investing in an index fund instead of buying individual stocks is diversification. But the benefit’s questionable when one stock going up 46% doesn’t offset another losing 7%.
Apple
Not all of the S&P 500’s big tech companies have been investing heavily in AI. Apple hasn’t – but the company arguably has other problems to deal with at the moment.
The latest earnings report indicated revenue growth of less than 2%, which doesn’t look strong. In fairness however, things are more impressive further down the income statement.
Sales in the Services division grew faster than the Products side of the business. And continued share buybacks meant earnings per share climbed 10%, which is more impressive.
The big issue the company’s facing however, is declining iPhone sales – especially in China. If that continues, it’s difficult to see how Services growth can continue indefinitely.
US stocks
I have a more positive view about Apple shares than a lot of investors at the moment. Despite the slow sales growth on the Products side of the company, I think the stock’s worth considering seriously.
By contrast, I don’t see the S&P 500 as an attractive option for me. The index doesn’t currently offer the benefits of diversification, so I’d rather achieve this by building a portfolio of individual stocks.
This post was originally published on Motley Fool
