The S&P500 Is Getting Riskier... Here's What It Means for You

So we make a lot of kind of academic economic videos on this channel, so I'm going over models, economic concepts, or whatnot. I want to keep this one a little bit more casual, and I'm sure a lot of you recently have seen the news about how the S&P is getting more risky. So I just want to explain what's going on there, why it matters to you, what it means, and whether it will continue or not. The core problem is that the S&P 500 is made up of 500 different companies, and a lot of Americans, and people internationally as well, but especially just pension funds, government funds, just your individual retirees, they put their money in the S&P. The S&P 500, which is made up of 500 companies, and that's because, well, it's stable, it represents the whole market. The fundamental idea there is that there's less risk. People buy the S&P because there's low risk and they're likely to get pretty good returns compared to a lot of other indexes, say CDs, bonds, fixed income instruments that they could purchase. So we have two assumptions there. The first is that, well, okay, it's a low risk asset, and the second is, well, it's a high return asset. Now, if you look at just the last five years, we're seeing this ridiculous pace of growth in the S&P. Over the last two years, in 2024, 2023, we've averaged over 20% gains a year, both years, the two consecutive years. I think that's happened one other time in the last 150 years. That's good in large part. However, there's also a lot of inherent risk in more returns, right? Risk and reward moves together. You get more risk, you get more reward, and vice versa. So if the S&P is producing significantly greater returns, that says something about the risk of the S&P. That said, this video is sponsored on behalf of Oncolytics Biotech, and I want to pause for a moment and tell you about their innovative fight against cancer. We all know that cancer is one of the most significant challenges facing humanity. In fact, according to the World Health Organization, one in six deaths globally are caused by cancer. And you may also know that cancer hides from the immune system, and this makes treatments a lot less effective and is a core part of the reason why cancer is so dangerous in the first place, because it means that the body's natural defenses can't be used against the attacking cancer and tumor. Now, what you probably haven't heard of is Pellorerep, and that is a cancer therapy delivered via IV. And it works by helping the body, the immune system, attack and detect cancer cells more effectively. It's like a targeting system if it was a video game for the body's pre-existing defenses. Like so, it both sparks immediate immune attacks and long-term immune memory to help prevent relapses, and it directly kills cancer cells by selectively replicating inside of tumor cells. And it's that replication that causes those tumor cells to split apart and release the signals that alert the immune system to an intruder, all while leaving normal cells unaffected. And as a therapy, it works alongside other therapies like chemo and checkpoint inhibitors. And for all of those reasons, Oncolytics is developing Pellorerep in combination with chemotherapy and immunotherapy. And it's showing encouraging results across pancreatic, breast, and gastrointestinal cancers. And it even received the Fast Track designation from the U.S. FDA in both pancreatic and breast cancer. All that said, here are some of the recent news that has come out about Oncolytics, in addition to some of their studies relating to Pellorerep. And that includes their clinical program plans and their establishment as the only platform immunotherapy for gastrointestinal tumors. And finally, they're also pursuing partnerships to help accelerate development and maximize the impact for patients. So a big thanks to Oncolytics for their work against cancer. And if you want to learn more on their website, you can view this link or click on the link in the description. And that said, let's get back to the SMP. And then the other point there is, well, the SMP is not risky because it's diversified. That's kind of a core assumption as to why people invest in it. But then the news coming out recently is that it's either seven or eight companies of the SMP, like the Mag7, the Mag8 is what this collection of seven is called. So that's like Apple, Microsoft, Google, Nvidia, etc., Tesla. Those companies are now 40% of the SMP by weight. So that means if the whole SMP was $10 trillion worth of market cap for the 500 companies, those seven or eight companies are worth $4 trillion of that $10 trillion. So what that means is if the average American has $100,000 in savings and they put that in the SMP to grow over time, they're actually putting $40,000 in just eight stocks. And that inherently, just like the return side of it, that presents a much higher level of risk. Because if any one of those companies has a serious problem, goes out of business, they're amazing businesses, but if something happened, then you're not insured or hedged against the risk because you've got their money. In 500 companies, you're going to lose like 10% of that. And that also inherently produces these volatile returns. That means you could have some very serious losses in the SMP. That in sum is why people are concerned with the SMP becoming a lot more risky over time. I think the next question is, well, will this trend continue? Right now we're at 40%. Is that going down to 20%? Is it going up to 60%? No one really knows. And a lot of people are saying that small cap stocks are going to have a rebound, which should include some of the kind of smaller companies in the SMP. But also some of the best run companies in the world are part of that MAG 7, MAG 8, just like that elite group of eight companies. And those are very well-run companies with incredible earnings potential that are forecasted to have pretty wild growth over the next one, two, five, 10 years. And I think that that's an inherent problem there, right? If those companies are growing at, let's say, 15% double digit revenue EPS growth per year, and the bottom 200 companies of the SMP are growing at 5% a year, well, of course, it's going to become 60% in five years, right? They're outgrowing everyone else. And when you think about the volume of businesses in that group, you have the potential for Tesla, Robotaxis, and autonomous robots. You have Nvidia and all their new chips and AI build out. And then you have just Google, DeepMind, Waymo, their cloud business is growing at 20%, 30% a year, just an incredible clip, right? There's so many businesses there. They're going to be started on Amazon, right? The list keeps going, really, that are doing really, really well and will continue to do really, really well for a long time. Now, there's also a lot of talk, right? There's a few perspectives there. One, that small caps start doing really well. Number two, that these companies also start doing really, really well, or keep doing really, really well, these top eight. There's a third perspective that a lot of money is going to start flowing as interest rates go down out of ETFs, out of indexes, and out of fixed income assets that are producing lower yields, and then into dividend stocks. If that happens as well, you should start to see a little bit of just growth subduing on those top eight growth stocks, because they're really all high growth tech stocks. So those are a few perspectives. But the fact that all of those have valid arguments attached to them means that really no one knows what's going to happen and where it's going to continue with that trend. So I think in totality, it comes down to you and your risk preference. If you're fine with having 40% of your cash in the S&P in eight stocks, go for it. If you want to buy other more stable, more diversified funds, also go for it. It really just matters to what you want, what kind of risk and reward you're comfortable with, what you think about those companies. So that's my little spiel for today. Do subscribe for more, and I'll see you in the next one.