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The first half of 2020 saw a growing disconnect between financial market performance and economic indicators. Stock market returns as measured by the S&P 500 have been resilient on a year-to-date basis, despite record unemployment and other headwinds dominating the news.

This month we analyze two potential causes of the disconnect and show that while the S&P 500 may be a good index to invest in, it is a poor representation of the broader economy. Specifically, we show that the COVID-19 pandemic has led to (i) heightened disparity of S&P 500 constituent returns and (ii) because of this disparity, S&P 500 index returns have been driven predominantly by a small subset of firms, namely Facebook, Amazon, Netflix, Google, and Microsoft (the so-called FANGM). Because these stocks have relatively low labor input, their outsize performance is not representative of the broader labor market and the overall economy.

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