The Self-Cleaning Portfolio
As a family of four, our oven has increasingly become one of our most used appliances. Between the nearly endless supply of chicken that 4- and 6-year-olds somehow are able to consume, birthday cakes, and daily meals, it gets plenty of use. Just like any well-used item, sometimes it needs cleaning. It must have been a parent who invented the self-cleaning function. I think about that feature every time someone asks me why they would want to own the S&P 500.
The index also self-cleans. In the 1970s, it was dominated by industrial conglomerates and oil majors. By the 1990s, financials and consumer brands had risen. Today, the ten largest names—Nvidia, Alphabet, Apple, Microsoft, Amazon, and peers—account for roughly 37% of the index. The composition is unrecognizable from a decade ago, and the investor who simply held an S&P 500 fund captured every transition without selling a single share. No taxable event. No trading cost. No decision required. Market-cap weighting does the rebalancing automatically. Growing companies take up more space, and shrinking ones take up less. Through periods of above-average heat, the oven keeps cleaning itself.
This year offers a vivid illustration of the cycle at work. Through early March, the S&P 500 sat roughly flat. But beneath the surface, stock returns have been widely dispersed. Technology and software stocks, the dominant drivers of the prior three-year bull run, have come under serious pressure. Microsoft has fallen this year-to-date, erasing nearly $500 billion in market value. The broader software sector has been hit even harder as investors question whether AI will disrupt traditional software business models. Chipmakers like AMD and Nvidia have also pulled back amid concerns over whether massive AI capital expenditure will generate adequate returns.
Meanwhile, energy stocks have surged over 10%, powered by geopolitical tension, rising oil prices, and the very AI buildout pressuring tech valuations since data centers require enormous electricity, and the companies providing that power are seeing unprecedented demand. Materials are up on rising gold and copper prices. Industrials and consumer staples have posted gains.
Like a self-cleaning oven, which still requires a manual wipe down after running, the S&P 500 is not purely passive. Its constituents are selected by a committee of full-time professionals at S&P Dow Jones Indices. Companies must meet criteria around market capitalization, liquidity, public float, and profitability, but meeting them does not guarantee inclusion. The committee exercises discretion, considering sector balance to keep the index representative of the broader market. During the 2008 financial crisis, it quietly set aside its own float rules to avoid removing AIG at a moment when doing so might have deepened the panic. The committee’s aim is not to pick winners and losers but to work to maintain a tidy reflection of corporate America.
This year’s rotation is the flavor the index was built to absorb. As tech cools, energy and industrials naturally rise. No sector stays on top forever, and the S&P 500 simply follows the market’s capital wherever earnings growth appears to be warming.
The oven keeps cleaning itself. Your job is just not to open the door.
Cam Simonds