If you picked a handful of random stocks each year on January 1st, weighted them equally in a portfolio, and then remained invested in those stocks until the end of the year, you’d find yourself underperforming index returns in most years.

It’s one of the worst-kept secrets in investing: A small group of stocks have generated most of the returns for U.S. investors over the last century.

That’s part of what’s made index investing so popular. Buying all the stocks ensures you’ll own the few on the fat tail of the distribution curve, and history has shown those great returns are enough to offset the detriment of also owning the laggards.

In 2023, just 29% of stocks are outperforming this year, the worst mark since 1998.

And those stocks aren’t lagging by just a little.

Don’t get me wrong, there’s nothing bearish about the median stock being up 8% for the year.

But that 8% pales in comparison to the 24% year-to-date rally for the index.

The 16-point disparity between the index and median stock return is unmatched over the last 2 decades, with only the 22% differences in 1998 and 1999 being worse.

Blame the mega caps.

Since the S&P 500 is a market cap-weighted index, the largest companies have the biggest impact on index returns.

And nearly all of the largest companies in the index are growth stocks in a year where growth has been heavily favored.

Here’s one more look at this year’s performance distribution.

More than 30% of the largest 50 S&P 500 stocks have gained at least 50% this year.

Just 10% of the total S&P 500 have.

In short, it’s the biggest stocks that had the best year in 2023.

While that’s good news if you owned some large-cap index, any other attempts to stock pick or diversify simply did nothing to enhance returns.

As the following chart shows, the disparity in performance between the mega-caps and everything else was huge in 2023.

While it is impossible to know what 2024 has in store for investors, the current rally has seen a broadening out with small caps staging a late-year sprint to the finish line.

It won’t be enough to close the annual performance gap, but it does provide investors some hope that the market has started to reward a greater number of holdings.