The S&P 500 is arguably the most important stock market index, and for good reason.
It tracks the 500 largest U.S.-based companies (with a few other criteria). Given that the U.S. has the largest economy and largest stock market in the world, it makes sense that the S&P 500 is often seen as the go-to benchmark.
Here are the three major milestones that the S&P just hit and some of the simplest ways of investing in large-cap stocks.
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1. An all-time high
The S&P 500 closed at an all-time high on March 28, the last day of the first quarter of 2024. But this all-time high feels different than past records.
The last five years have been a whirlwind in the U.S. stock market. It was at a record high at the beginning of 2020, sold off big time from COVID-induced fears, recovered to go on a tear through the rest of 2020 and 2021, sold off in 2022 due to inflationary pressures and recession fears, and then staged a recovery in 2023 that continues into this year.
If you were to ask investors at the end of 2022 if the market would be making new highs in a little over a year, they probably would have thought you were looking through rose-tinted glasses. But that's precisely what happened, not so much because of where the economy is, but where it could be headed.
The prospect of lower interest rates and higher earnings is a one-two punch for higher valuations. Investor sentiment is positive, and sentiment more so than fundamentals can drive a rally -- at least in the short-term.
2. A $46 trillion market cap
Every month, S&P Dow Jones Indices, a division of S&P Global, updates its index data. As of March 28, the S&P 500 has 503 constituents for a total market cap of $46.25 trillion. For comparison, S&P 500 China has 574 constituents with a total market cap of $7.55 trillion.
The sheer size of the U.S. stock market illustrates the leadership of American companies on the global stage, and the reliability that investors find in the nation's economy relative to other stock markets.
3. Tech dominance
The S&P 500 is unique for its size, but also its composition. Information technology makes up 13.5% of the China S&P 500, but 29.6% of the S&P 500. That means that the U.S. tech portion of the S&P 500 is worth more than most stock markets worldwide.
In the past, investors might have seen the Nasdaq Composite as more tech-focused and the S&P 500 as more representative of the broader stock market, but that is no longer the case.
Also note that financials make up 13.2% of the S&P 500, and healthcare accounts for 12.4%. When the U.S. stock market first started, these sectors essentially didn't exist. It was all about physical industries, like manufacturing, utilities, communication, energy, materials, and the like.
Understanding how the stock market has evolved and the composition of the S&P 500 can help you make more-informed investment decisions. For example, the tech sector usually trades at a premium to the S&P 500. The fact that tech is the only sector that outperformed the S&P 500 over the last five years shows the extent to which it has carried the index to new highs. A consequence is that the S&P 500 has gotten more expensive because it has so much more tech.
The S&P 500's price-to-earnings (P/E) ratio of 27.9 might look sky-high compared to historic averages. Again, this has less to do with the rest of the market getting more expensive and more to do with tech elevating the multiple of the S&P 500.
The P/E of the Technology Select Sector SPDR Fund, which closely tracks the tech sector, is 39.2. That means that the non-tech portion of the S&P 500 has a 23.2 P/E -- which sounds a lot more reasonable than 27.9.
In sum, understanding market dynamics can help you make informed decisions rather than relying too heavily on surface-level figures.
Basic market exposure
Whether you are new to investing or are looking for low-cost ways to invest in the S&P 500, a Vanguard exchange-traded fund (ETF) or index fund is the best choice.
The Vanguard S&P 500 ETF (VOO 0.35%) has a 0.03% expense ratio, making it one of the least expensive ways to invest in the index.
The Vanguard Growth ETF (VUG 0.25%) has just a 0.04% expense ratio and targets the faster-growing but more-expensive pockets of the market. Consequently, over 55% of the fund is in technology.
The Vanguard Value ETF (VTV 0.39%) has a lower P/E and higher yield than the Vanguard S&P 500 ETF because it emphasizes stable, dividend-focused companies.
All three funds provide passive market-investing strategies if you are looking for low-cost ways to achieve instant diversification.
An ever-changing benchmark
Because it is frequently re-weighted based on the market cap of its holdings, the composition of the S&P 500 can change by quite a bit in a short period of time. It can also become a victim of its own success, as the performance of the tech sector now has a huge role in the performance of the index.
Understanding what goes into the S&P 500 can help you properly measure your performance against the index. If you own a lot of growth and tech stocks, it might be a fair comparison. But if you are more value- and income-focused, then the S&P 500 might not be as good a benchmark for you.
