The S&P 500 is up 8.8% for the year through May 25. So, we should start celebrating a bull market, right?

But look deeper, and a different picture emerges. Take away the top ten, mostly technology, names, and the market return falls to zero. Moreover, those ten stocks performed horribly last year, with an average decline of 43%. The average stock in the broader market, defined as the largest 3,000 stocks in the United States, is also flat for the year. Such narrow leadership is not what we expect in a full-bore bull market.

Stumbling Block

The market hit a stumbling block in March. That month, we saw some prominent regional banks fail, followed by debt ceiling worries. The short-lived “junk” rally of January and February, which saw low-quality stocks jump 8%, came to a screeching halt.

Since early March, the highest-quality stocks found ample buyers, while the lowest-quality stocks coming under the most selling pressure. Here is the performance of the WCA Quality Indices1 from March 1, 2023, to May 25, 2023:

• WCA “A” Quality: +0.9%

• WCA “B” Quality: -2.9%

• WCA “C” Quality: -7.6%

• WCA “D” Quality: -8.2%

• WCA “F” Quality: -10.9%

As you can see, when stress emerged, higher quality companies with low debt, profitable assets, and steady businesses did the best. And we should not be surprised. It makes perfect sense that such companies, the most durable, flexible, and predictable ones, would shine in the face of uncertainty.

Pain Among High Yield Stocks

What did not work? The highest dividend-yielding companies, which also tend to earn the lowest WCA Quality grades, stumbled badly after regional bank troubles. The Dow Jones Select Dividend Index, based almost entirely on dividend yield, was down 9%, in line with the “D” and “F” quality companies. Once again, the highest-yielding stocks and the lowest-quality stocks proved to be highly correlated.

The S&P 500’s 8.8% year-to-date return, dominated by a bounce in a handful of popular stocks, offers scant evidence of a robust bull market. Such a market would involve greater participation spread across a wider array of stocks. Moreover, the fact that investors are flocking to the highest ground speaks to continued investor caution.


Although the S&P 500 is up for the year, we should remain mindful of risk. As the last several weeks have again proven, unforeseen events have hurt the weakest, highest-yielding, lowest-quality companies. By contrast, the highest quality companies with most solid balance sheets, most consistent businesses, and most profitable assets provided far better shelter from the storm.

And if the market rallies from here, and we do begin a new bull market, we expect high-quality companies to go along for the ride.

In the meantime, we will stick to our knitting, focused first on the most critical issues: quality and value.

1Note: The WCA Quality Grade indices are proprietary quantitative indices focused on fundamentals. Indices are for informational purposes only and do not reflect the performance of any actual WCA investment strategy. From 2000-2022, we analyzed and ranked the top 1,000 U.S. companies based on debt, profitability, and business consistency. Rankings were organized into five categories ranging from “A” to “F”, with “A” receiving the highest quality designation and “F” the lowest. Each grade category formed an equally-weighted, annually reconstituted index with then-available data (to avert lookback bias).

Kevin R. Caron, CFA
Senior Portfolio Manager

Chad Morganlander
Senior Portfolio Manager

Matthew Battipaglia
Portfolio Manager

Steve Lerit, CFA
Senior Risk Manager

Tom Serzan

Suzanne Ashley
Internal Relationship Manager

Eric Needham
Director, External Sales and Marketing

Jeffrey Battipaglia
Client Portfolio Manager


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