Is the S&P 493 Poised to Outperform the Market?

The S&P 500 is often viewed as a broad measure of the stock market, but in recent years, a handful of mega-cap technology companies have dominated its performance. This has led to increased interest in analyzing the index without these outliers, commonly referred to as the “S&P 493″—the remaining stocks after excluding the largest seven.

With concerns about market concentration and sector imbalances, investors are questioning whether this broader group of stocks could outperform moving forward. Understanding their performance requires examining how they are calculated, their sector composition, and the impact of volatility and market trends.

Calculation Approach

The S&P 493 is derived by removing the largest seven companies from the S&P 500, significantly altering its weighting and valuation metrics. Since the S&P 500 is a market-capitalization-weighted index, excluding its most valuable firms redistributes influence among the remaining stocks. This results in a lower aggregate market capitalization and a different earnings profile, affecting valuation multiples such as the price-to-earnings (P/E) ratio and price-to-book (P/B) ratio.

A key effect of this adjustment is the shift in earnings contribution. The largest companies in the S&P 500 generate a disproportionate share of total index earnings, so their removal lowers the overall earnings per share (EPS) of the remaining stocks. This can make the S&P 493 appear more attractively valued on a P/E basis, but it also reflects lower aggregate profitability. Investors must account for these changes when comparing historical performance or making forward-looking projections.

Dividend yields also shift, as the largest technology firms tend to reinvest profits rather than distribute them. The S&P 493, with a higher concentration of dividend-paying companies from financials and consumer staples, may exhibit a higher average yield. This can appeal to income-focused investors, but it also means the index’s total return relies more on dividends and less on capital appreciation, which has been a major driver of the S&P 500’s gains in recent years.

Sector Representation

The composition of the S&P 493 differs meaningfully from the full S&P 500 due to the removal of the largest technology firms, leading to a more balanced distribution across industries. Without the dominance of mega-cap tech stocks, sectors such as financials, industrials, healthcare, and consumer staples hold greater influence.

Industrials and financials play a larger role in the S&P 493 and are more tied to economic cycles. Banks, insurers, and asset managers within the financial sector react to interest rate movements and credit conditions, making them more sensitive to Federal Reserve policy decisions. Industrials, including companies in manufacturing, transportation, and defense, depend on capital expenditures and infrastructure spending, which fluctuate with economic growth and government policy. These dynamics introduce different macroeconomic risks compared to the technology sector’s focus on innovation and scalability.

Healthcare also becomes more prominent, encompassing pharmaceuticals, medical devices, and healthcare services. This sector benefits from demographic trends such as an aging population and increased healthcare spending but faces regulatory risks, including drug pricing policies and reimbursement changes under Medicare and Medicaid. The removal of large-cap tech stocks reduces exposure to high-growth, high-margin businesses, making the earnings profile of the S&P 493 more reliant on stable but slower-growing industries.

Consumer staples, which include food and beverage companies, household goods manufacturers, and retailers, gain more significance in this adjusted index. These companies tend to have consistent revenue streams, as demand for essential goods remains steady regardless of economic conditions. While this defensive positioning can provide stability during market downturns, it also limits the potential for outsized gains during bull markets. The trade-off between lower volatility and reduced growth potential is an important consideration for investors evaluating the S&P 493.

Market Influence of Outliers

The dominance of a few massive corporations in the S&P 500 makes it difficult to assess broader market performance. These outliers not only drive index returns but also distort traditional valuation metrics, making it harder to gauge the health of the remaining stocks. Their sheer size means that when they experience rapid gains, they can push overall index levels higher even if most other companies are underperforming.

Earnings season further amplifies this imbalance. Large-cap companies report their financial results earlier in the cycle, setting the tone for market sentiment. If they post strong earnings, it can overshadow weaker reports from smaller firms. Conversely, disappointing results from a single mega-cap stock can drag down the entire index, even if a majority of companies post solid numbers. This effect complicates forecasting models and sector rotation strategies, as trends observed in the full index may not accurately reflect the underlying performance of most of its components.

Capital flows also contribute to the divergence. Institutional investors, particularly those managing index-tracking funds, allocate capital based on market capitalization weightings. As large companies grow, they attract even more investment, reinforcing their dominance. Meanwhile, smaller firms receive a lower proportion of new capital inflows, limiting their ability to benefit from broad market rallies. This self-reinforcing cycle can suppress price discovery for mid- and small-cap stocks, making it harder for undervalued companies to gain traction.

Volatility Factors

The S&P 493 exhibits different volatility dynamics compared to the full S&P 500 due to structural differences in company size, sector balance, and liquidity. Smaller market capitalizations mean these stocks are often more sensitive to economic data releases, monetary policy shifts, and broader market sentiment. Unlike mega-cap firms that benefit from diversified revenue streams and global market dominance, mid-sized companies in the S&P 493 tend to have more concentrated business models, making them more vulnerable to industry-specific disruptions and macroeconomic shocks.

Market liquidity also plays a role in volatility. The largest companies in the S&P 500 have deep trading volumes and extensive institutional ownership, which can dampen extreme price swings. In contrast, many stocks in the S&P 493 experience lower trading activity, increasing the likelihood of price gaps and wider bid-ask spreads during periods of uncertainty. This reduced liquidity can exacerbate selling pressure during downturns, leading to sharper declines compared to the broader index. Additionally, the absence of the largest technology firms means the S&P 493 has less exposure to companies with historically strong balance sheets and consistent revenue growth, which can act as stabilizing forces.