Going into 2023, many people felt a U.S. recession and market decline was inevitable. However, despite interest rate increases, a flash in the pan regional banking crisis and debt ceiling standoff, the inevitable market decline has failed to materialize.

What gives? Well, to understand the market in 2023 you need to have a working knowledge of video game intros, artificial intelligence and the Magnificent Seven.

If you’ve played video games at any time over the past 25 years, you may have noticed that NVIDIA is a common developer credit you’ll see before your game starts. This is because NVIDIA designed the graphics processing units (GPU) that are the backbone of the gaming industry. NVIDIA’s GPUs are what make the difference between a video game from 2001 and one made in 2021.

Are video games responsible for NVIDIA’s 190% return in 2023 and increase from a $400 billion company to being worth more than $1 trillion? Not quite, but this is where the story gets interesting. The same GPUs responsible for improved video game graphics are the best tools to train neural networks on the datasets necessary for large language models (LLMs).

LLMs are a form of artificial intelligence (AI) that are trained on vast amounts of text data to generate human-like text responses. They took the world by storm in November last year with the release of ChatGPT 3.5.

GPT 3.5 (and later GPT 4) was the first widely available LLM that was useful for tasks such as coding, marketing and writing. NVIDIA, being the supplier of the GPUs necessary to train LLMs, has seen their stock skyrocketed in value to become one of the top ten companies in the U.S.

This is where the S&P 500 comes in. You may have noticed the S&P 500 index has had an exceptional year with a 16.89% year-to-date return at the end of the second quarter on June 30, which is welcome news for investors who had their portfolios bruised in 2022. However, this number masks the narrowness of where that return has come from.

Enter the Magnificent Seven, who some believe will be the greatest beneficiaries of the AI revolution. More than 70% of the gains from the S&P 500 up until June 30 can be attributed to these seven companies: Apple, Microsoft, NVIDIA, Amazon, Meta (Facebook), Tesla and Alphabet (Google).

While Magnificent Seven companies returned on average 89% in 2023, the remaining stocks in the index averaged roughly 7.5%, with just under 40% of the companies posting negative returns. At the end of May, the five largest stocks had been responsible for 78% of the market’s return. Historically, the five largest companies have made up 3% of the market’s overall return on average.

This leaves us with lessons we can learn from so far this year. First, despite the concentration of returns this year, I still believe they provide a strong case for diversification. For matters of practicality, we just don’t know when great returns are going to arrive or where from. The 89% average return from these seven companies sounds wonderful in 2023, but would you have wanted to own only these companies in 2022 when their average return was -46%? I think not.

On the philosophical front, as NVIDIA’s rise shows, we still have no idea where innovation will come from or when. Few people appreciated the role GPUs, primarily used for video games, played in developing AI, fewer foresaw the potential productivity of LLMs, and no one had November 2022 for the date of their arrival. Innovation is random.

The final lesson is one we repeat time and time again: You should stick with your strategy and stay in the market. There is always a news story that tests our resolve to stay invested, whether it be Silicon Valley Bank back in March or the debt ceiling standoff in May.

However, trying to time these events consistently is impossible. Investment returns do not happen at a steady march. They occur at their own unpredictable pace, whether marching slowly forward, backsliding or with random sprints like we saw in June. Therefore, missing the best week can significantly impact your investment return.

Nicholas Haberling is a partnership advisor at Community First Bank & HFG Trust in Kennewick.