The S&P 500‘s the US’s flagship stock market index, but its tremendous growth over the last five years is making it increasingly popular here in the UK. In fact, there are numerous index tracker funds for this index listed in London granting British investors easy access.
Of course, with higher returns comes increased volatility. And compared to the FTSE 100, the S&P 500 behaves far more erratically. So how much money would I have today if I invested £5,000 in a low-cost index fund back in 2019?
The five-year return
In November 2019, the S&P 500 sat comfortably at 3,093 points. That story swiftly changed a few months later when the pandemic hit. Eventually, the US stock market rebounded, only to take another tumble a year later as inflation and interest rates began surging.
Today, economic conditions have started stabilising. And with the financial outlook improving, bolstered investor confidence has started sending stocks back in the right direction, helping the S&P 500 reach a new all-time high just a few weeks ago.
At 5,713 points, investors have reaped an impressive 84.7% return in five years. But don’t forget, while the index’s dividend yield isn’t as impressive as the FTSE 100’s, it’s still significant. And factoring in these extra gains pushes the total return over this period to 100%.
In other words, if I had invested £5,000 in the S&P 500 five years ago, I’d now have £10,000. By comparison, the same investment in the FTSE 100 would have only grown to £6,715.
Digging deeper
The performance differences between the UK and US flagship indices can largely be attributed to exposure to the technology sector. Only 1% of the FTSE 100 by weighting consists of tech stocks versus the S&P 500’s 33%. And it’s no secret just how lucrative this sector’s been over the last decade.
Lately, companies like Nvidia (NASDAQ:NVDA) have been dominating. With artificial intelligence (AI) investments rising, demand for accelerated chips has skyrocketed, pushing the chip designer’s financials to record highs.
To put this growth into perspective, revenue for the last quarter of its 2024 fiscal year ending in January came in at $22bn. By comparison, revenue for its entire 2023 fiscal year was $27bn. At the same time, operating profits skyrocketed from $4.2bn to $32.9bn between January 2023 and 2024 – a 680% increase! And looking at the latest results, Nvidia’s charging full steam ahead.
But as jaw-dropping as these returns have been, Nvidia’s growth trajectory could start to slow. Businesses worldwide are investing billions into developing AI tools and infrastructure. Yet, so far, these haven’t delivered on their promised returns.
Suppose positive results don’t start emerging soon? In that case, global AI spending could come crashing back down to earth. And since Nvidia’s valuation’s currently being driven by expectations rather than fundamentals, such a situation would be disastrous for its share price.
Nvidia’s not the only S&P 500 stock whose valuation’s being driven by AI spending expectations. As such, the index is also likely to experience significant volatility should the worst come to pass.
This post was originally published on Motley Fool
