4 | 2023 Investment Outlook | December 12, 2022 What About Those Mega Tech Stocks? ƒ At their peak in 2000, the five largest tech-related stocks comprised just over 20% of the S&P 500. 3 ƒ Those same stocks bottomed five years later, dropping to only 5% of the S&P 500. 4 ƒ At their peak in 2022, the five largest tech stocks comprised roughly 25% of the index. Are they now headed to 5%? ƒ On one hand, the 30 times average valuations of the five largest tech stocks today will never reach the triple-digit valuations of 2000. ƒ But what has historically stunted the growth of the mega S&P 500 stocks is the U.S. government’s desire to abate their dominance—and we are now seeing that with increased regulatory scrutiny. ƒ Bolt-on acquisitions have boosted megasized companies’ sales growth, averaging roughly 5 100/year during the 2010s. Year-to-date, however, only 22 acquisitions have been completed. ƒ We believe slowing growth rates combined with premium valuations will allow the S&P equal- weighted to continue to outperform the S&P 500 cap-weighted. ƒ We are reducing our exposure to these megacap stocks for these reasons. Overseas Considerations 6 ƒ Non-U.S. markets finally began outperforming the U.S. when the dollar peaked in late September. ƒ Asia ex Japan has lead since the end of October, outperforming Europe and Japan, which have 7 both outperformed the U.S. ƒ As China’s zero-COVID policies begin to moderate. Combined with a weaker dollar, that could make China an intriguing equity area for 2023. “The economy is proving too resilient, causing the ‘looming collapse’ in earnings to remain elusive for yet another quarter.” 1 John Raphael, November 20, 2022. 2 Bloomberg, November 29, 2022. 3 Microsoft, Cisco Systems, Nokia, Intel and IBM. S&P 500 weighting. Bloomberg. 4 Apple, Microsoft, Google, Amazon and Tesla. Bloomberg. 5 US Weekly Kickstart, Goldman Sachs, November 11, 2022. 6 Bloomberg. 7 FactSet. Past performance is no guarantee of future results. The returns referred to in the commentary are those of representative indexes and are not meant to depict the performance of a specific investment. See Disclosure section for index definitions. Risk Considerations: The value of equity securities can fluctuate in response to activities specific to a company. Stocks of small- and medium- capitalization companies entail special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Nondiversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility.