There's a lot of turnover in the S&P 500 🔁
Plus a charted review of the macro crosscurrents 🔀
📈The stock market rallied to all-time highs, with the S&P 500 setting an intraday high of 6,978.36 and a closing high of 6,966.28 on Friday. The index closed the week at 6,966.28 and is now up 1.8% year-to-date. For market insights, check out the Stock Market tab at TKer. »
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The stock market and broad market indices, such as the S&P 500, are not static.
The stocks that comprise the market are constantly changing as companies grow, shrink, merge, privatize, or go bellyup.
“On average, 20% of S&P 500 constituents turn over every five years,” Goldman Sachs’ Ben Snider wrote in his Jan. 6 research note.
He shared this chart showing how this metric has evolved since 1985.
This phenomenon is critical to understanding why the stock market behaves as it does. (In fact, it’s TKer Stock Market Stock Market Truth No. 9.)
In any given period, there are stocks driving the overall market higher. And often, many of these market leaders eventually stumble and underperform. BUT other stocks always emerge to take the baton and extend the market’s very long trend higher.
As we discussed last week, six of the Magnificent 7 were only added to the S&P 500 over the past 25 years.
Beating the market is very hard 😭
This turnover means it’s incredibly difficult to not only know which stocks to own, but also when to own them.
To that former point, we know that the market’s historical returns have been driven by a minority of names. In other words, picking a market-beating stock is worse than a coin flip: You’re more likely to underperform than outperform.
To that latter point, it’s not enough to know when to buy a market leader. You also have to know when to sell before it starts to lag and drag on your returns. And these trades may be getting even harder to time as the average S&P company is spending less time in the index.
Buying and holding an S&P 500 index fund is considered passive investing because it doesn’t require the investor to make many trades.
However, as history shows, this type of passive investing means the fund investor is holding a varying mix of stocks as companies regularly enter and leave the index.
The good news for investors is that S&P has done a pretty good job of capturing the winners while weeding out the losers, as reflected by the fact that the index continues to trend higher.
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Related from TKer:
700+ reasons why S&P 500 index investing isn’t very ‘passive’💡
Narratives will change, and yet the stock market will go up 🆙
📺 🎧Watch and Listen!
I was on the Excess Returns podcast with Matt Zeigler and Kai Wu. We discussed stock market valuations, elevated profit margins, the perils of trading bubbles, structural changes at the big tech companies, and more! Check it out on Apple Podcasts, Spotify, or YouTube!
🎲🎰 See me in Las Vegas!
I’ll be leading a breakout session at The MoneyShow TradersExpo in Las Vegas. The conference runs from February 23 to 25. Sign up here!
Review of the macro crosscurrents 🔀
There were several notable data points and macroeconomic developments since our last review:
📉 Job creation was positive in December, but the trend is negative. According to the BLS’s Employment Situation report released Friday, U.S. employers added just 50,000 jobs in December, down from 56,000 jobs in November. The rolling three-month average was -22,000 — a reminder that we’re at an economic tipping point.
Total payroll employment was at 159.5 million jobs in December, down slightly from the September peak.
The unemployment rate — that is, the number of workers who identify as unemployed as a percentage of the civilian labor force — declined to 4.4% in December, but remains near the highest level since October 2021.
The labor market clearly isn’t as hot as it used to be.
For more on the labor market, read: We’re at an economic tipping point ⚖️ and 9 once-hot economic charts that cooled 📉
💸 Wage growth cools. Average hourly earnings rose by 0.33% month-over-month in December, up from the 0.24% pace in November. On a year-over-year basis, December’s wages were up 3.8%.
💰 Job switchers still get better pay. According to ADP, annual pay in December for people who changed jobs was up 6.6% from a year ago. For those who stayed at their job, pay was up 4.4%.
For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed’s war on inflation 📈
💼 Job openings tick lower. According to the BLS’s Job Openings and Labor Turnover Survey, employers had 7.15 million job openings in November, down from 7.45 million in October.
During the month, there were 7.83 million unemployed people — meaning there was 0.9 job openings per unemployed person. This remains one of the most straightforward indicators of labor demand. However, this metric has returned to prepandemic levels.
For more on job openings, read: Were there really twice as many job openings as unemployed people? 🤨 and Revisiting the key chart to watch amid the Fed’s war on inflation 📈
👍 Layoffs remain depressed, hiring remains firm. Employers laid off 1.69 million people in November. While challenging for the people affected, this figure represents just 1.1% of total employment. This metric remains slightly below prepandemic levels.
For more on layoffs, read: Every macro layoffs discussion should start with this key metric 📊
Hiring activity continues to be much higher than layoff activity. During the month, employers hired 5.11 million people.
That said, the hiring rate — the number of hires as a percentage of the employed workforce — has been trending lower, which could be a sign of trouble to come in the labor market.
For more on why this metric matters, read: The hiring situation 🧩
🤔 People are quitting less. In November, 3.16 million workers quit their jobs. This represents 2.0% of the workforce. The rate continues to trend below prepandemic levels.
A low quits rate could mean a number of things: more people are satisfied with their job, workers have fewer outside job opportunities, wage growth is cooling, or productivity will improve as fewer people are entering new, unfamiliar roles.
For more on this dynamic, read: The crummy labor market is yielding a ‘tenure dividend’ for corporations 💰
💪 Labor productivity increases. From the BLS: “Nonfarm business sector labor productivity increased 4.9% in the third quarter of 2025 … as output increased 5.4% and hours worked increased 0.5 percent. (All quarterly percent changes in this release are seasonally adjusted annualized rates.) From the same quarter a year ago, nonfarm business sector labor productivity increased 1.9% in the third quarter of 2025.”
For more, read: Promising signs for productivity ⚙️ and The crummy labor market is yielding a ‘tenure dividend’ for corporations 💰
💼 New unemployment insurance claims tick higher, total ongoing claims rise. Initial claims for unemployment benefits rose to 208,000 during the week ending Jan. 3, up from 200,000 the week prior. This metric remains at levels historically associated with economic growth.
Insured unemployment, which captures those who continue to claim unemployment benefits, rose to 1.914 million during the week ending Dec. 27.
Low initial claims confirm that layoff activity remains low. However, continued claims have recently moved a bit higher, suggesting that laid-off workers are having difficulty finding new jobs.
For more context, read: The hiring situation 🧩 and The labor market is cooling 💼
👎 Consumer vibes are in the dumps. The Conference Board’s Consumer Confidence Index fell 3.8 points in December. From the report: “The Present Situation Index declined as net views on current business conditions were negative for the first time since September 2024, a month that included a labor market scare and deadly hurricanes. …Two of the three Expectations Index components dipped in December. November’s nosedive in expectations for business conditions six months from now mostly reversed in December but remained negative.“
More from the report: “Among demographic groups, on a six-month moving average basis, confidence dipped among all age groups in December, although consumers under 35 continued to be more confident than consumers age 35 and older. There were few generational differences, as confidence among all generations trended downward in the month, with only the Silent Generation becoming more hopeful. Millennials and Gen Z remained the most optimistic of all generations surveyed.“
Relatively weak consumer sentiment readings appear to contradict relatively strong consumer spending data. For more on this contradiction, read: What consumers do > what consumers say 🙊 and We’re taking that vacation whether we like it or not 🛫
🎈 Inflation expectations could be cooler. From the New York Fed’s December Survey of Consumer Expectations: “Median inflation expectations increased by 0.2 percentage point to 3.4% at the one-year-ahead horizon in December. They were unchanged at the three-year and five-year-ahead horizons (3.0%).”
👎 Consumers don’t feel good about the labor market. From The Conference Board: “Consumers’ views of the labor market were also weaker in December. 26.7% of consumers said jobs were ‘plentiful,’ down from 28.2% in November. 20.8% of consumers said jobs were ‘hard to get,’ up from 20.1%.”
Many economists monitor the spread between these two percentages (a.k.a., the labor market differential). The direction of the spread reflects a cooling labor market.
More from The Conference Board: “Consumers were on net a bit more worried about the labor market outlook in December 16.5% of consumers expected more jobs to be available, unchanged from November. 27.4% anticipated fewer jobs, up from 26.8%.“
From the New York Fed’s December Survey of Consumer Expectations: “The mean perceived probability of finding a job if one’s current job was lost fell by 4.2 percentage points to 43.1%, reaching a new series low. The decline was driven by respondents with annual household incomes below $100,000 and it was most pronounced for those above age 60 and those with a high school degree or less.”
For more on the labor market, read: The labor market is cooling 💼
💳 Card spending data is holding up. From JPMorgan: “As of 02 Jan 2026, our Chase Consumer Card spending data (unadjusted) was 5.2% above the same day last year. Based on the Chase Consumer Card data through 02 Jan 2026, our estimate of the US Census November control measure of retail sales m/m is 0.49%.“
From BofA: “Total credit and debit card spending per household rose 1.8% year-over-year (YoY) in December, according to Bank of America aggregated card data, up from 1.3% YoY in November. Seasonally-adjusted (SA) spending growth rose 0.5% month-over-month (MoM).“
Consumer spending data has looked a lot better than consumer sentiment readings. For more on this contradiction, read: What consumers do > what consumers say 🙊 and We’re taking that vacation whether we like it or not 🛫
⛽️ Gas prices continue to fall. From AAA: “The new year begins with the lowest national average in years at $2.81. The last time the national average for a gallon of regular gas was this low was back in March of 2021. Crude oil prices remain relatively unchanged from the end of 2025 and unaffected amid questions about Venezuela’s impact on the oil market. Currently, the global oil supply is strong, as OPEC+, the coalition of oil-exporting countries, says it’s not planning any production hikes in the first quarter of 2026 due to lower demand.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage inched up to 6.16%, up from 6.15% last week: “In the first full week of the new year, mortgage rates remained within a narrow range, hovering close to the 6% mark. The combination of solid economic growth and lower rates has led to improving momentum in for-sale residential demand, with purchase applications up over 20% from a year ago.”
As of Q3, there were 148.3 million housing units in the U.S., of which 86.9 million were owner-occupied and about 40% were mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🏭 Business investment activity improves. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — increased 0.5% to $78.0 billion in October.
Core capex orders are a leading indicator, meaning they foretell economic activity down the road.
For more on the major macro metrics, read: We’re at an economic tipping point ⚖️
🛠️ Industrial activity ticked higher. Industrial production activity in November increased 0.2% from prior month levels. Manufacturing output stayed flat compared to the prior month.
👎 Manufacturing activity surveys weren’t great. From S&P Global’s November U.S. Manufacturing PMI: “Although manufacturers continued to ramp up production in December, suggesting the goods-producing sector will have contributed to further robust economic growth in the fourth quarter, prospects for the start of 2026 are looking less rosy. Something of a Wile E. Coyote scenario has developed, whereby – just like the cartoon character continues to run despite chasing the roadrunner off a cliff– factories are continuing to produce goods despite suffering a drop in orders. The gap between growth of production and the drop in orders is, in fact, the widest seen since the height of the global financial crisis back in 2008-9. Unless demand improves, current factory production levels are clearly unsustainable. Payroll numbers will also be adversely impacted if production capacity has to be scaled back.”
The ISM’s December Manufacturing PMI also deteriorated from prior month levels.
🤷 Services activity surveys weren’t great. From S&P Global’s December U.S. Services PMI: “Not only has service sector business activity slowed in response to concerns over order books, with the December surveys signaling the weakest economic expansion since last April, but the number of companies cutting headcounts has exceeded those reporting higher employment for the first time since February. We also enter 2026 with future output expectations running much lower than seen at the start of 2025, fueling concerns that December’s slowdown and job market malaise could spill over into the new year.”
Meanwhile, the ISM’s December Services PMI signaled accelerating growth.
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊
📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 5.1% rate in Q4.
For more on GDP and the economy, read: 9 once-hot economic charts that cooled 📉 and We’re at an economic tipping point ⚖️
Putting it all together 📋
🚨 The Trump administration’s pursuit of tariffs is disrupting global trade, with significant implications for the U.S. economy, corporate earnings, and the stock market. Furthermore, the delay of economic data from federal agencies due to the government shutdown has made it more challenging to read the economy. Until we get more clarity, here’s where things stand:
Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Job creation, although cooling, appears to be modestly positive, and the Federal Reserve — having resolved the inflation crisis — shifted its focus toward supporting the labor market.
But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings and core capex orders have faded. It has become harder to argue that growth is destiny.
Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.
Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.
For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 65% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2024. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 85% underperformed. Over a 10-year period, 90% underperformed. And over a 20-year period, 92% underperformed. This 2023 performance follows 14 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, just 4.21% of all U.S. equity funds in the top half of performance during the first year were able to remain in the top during the four subsequent years. Only 2.42% of U.S. large-cap funds remained in the top half
SPDJI’s report also considered fund performance relative to their benchmarks over the past three years. Of 738 U.S. large-cap equity funds tracked by SPDJI, 50.68% beat the S&P 500 in 2022. Just 5.08% beat the S&P in the two years ending 2023. And only 2.14% of the funds beat the index over the three years ending in 2024.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 19% of the stocks in the S&P 500 outperformed the average stock’s return from 2001 to 2025. Over this period, the average return on an S&P 500 stock was 452%, while the median stock rose by just 59%.
