1.    The Big 7

The knock on the market’s most recent rally is that returns have been unusually narrow (Chart 1). In other words, if one were to extract seven names from the S&P 500, the index would only be positive +2% this year. In prior imbalanced periods, defensive sectors and dividend growers have outperformed the following year.    

2.    Healthcare Innovations

We may be entering the “golden age” for advancements in healthcare. A few recent examples: (1) A new treatment for postoperative lung cancer patients may cut mortality by more than half; (2) 400 million people worldwide are afflicted by diseases from single-gene mutations that could be simple for Crispr gene therapy to fix (congenital blindness, heart disease, diabetes and cancer); (3) Oxford University’s R21 malaria vaccine is being rolled out in several African countries this year and has shown 80% efficacy. Malaria kills more than 600,000 people each year (primarily children). 

3.    Recession Indicators

With 5 of the 7 recession indicators moving into the caution zone (Chart 2), we would expect the start of a mild recession in Q3 of this year (with the understanding that recession dates are never fully announced until after the fact). The sticking point for the Fed has been low unemployment / wage inflation. However, with the unemployment rate moving higher, from 3.4% to 3.7% and jobless claims at 20 month highs, it seems that rate hikes are starting to realize their desired outcome.    

"Big 7" stocks represent the overwhelming proportion of returns so far in 2023

Proportion of year-to-date returns within the S&P 500 including dividends, by Big 7 stocks versus the other 496 stocks*

The S&P 500's YTD total return is 14.2%. Apple represents 18.7% of that return, Microsoft 15.9%, and so forth. The Big 7 collectively represents 83.1% of the index's total return.

*There are currently 503 stocks in the S&P 500 Index

Source: RBC Wealth Management, FactSet; data through 6/23/23

U.S. recession scorecard

Source - RBC Wealth Management