Companies with high levels of customer satisfaction, as measured by the American Customer Satisfaction Index (ACSI), typically do very well in the stock market. This is because they tend to have strong customer loyalty, which, in turn, has exponential positive effects on profit and revenue growth. A stock portfolio of the top scoring 30-35 ACSI companies in their respective industries, weighted by customer satisfaction elasticity to customer retention, reveals something extraordinary: A reversal of both the law of diminishing returns and the notion of high risk/high return. Accordingly, investments in the top ACSI companies tend to produce above market returns and lower risk.
Cumulative Total Return (2006 – 2024)
ACSI vs S&P 500 (SPY) vs S&P 500 Equal Weight (RSP)
From January 2006 through December 2024, the ACSI Leaders portfolio generated a cumulative return of 2,160% versus 587% for the S&P 500 and 463% for the S&P 500 Equal Weight Index, with corresponding annualized returns of 17.8% for the ACSI Leaders portfolio and 10.7% for the S&P 500.
Beginning in 2020 as a result of the global pandemic, there were supply constraints, labor shortages, and inflation, followed by a host of market anomalies. These issues affected not only the stock market but the economy at large, leading to an environment where consumer demand exceeded supply in many markets. This took place during a period when customer satisfaction declined substantially, with the national ACSI score dropping by a record amount from the first quarter of 2018 to the second quarter of 2022. When demand exceeds supply, there is less competition and customer satisfaction becomes less critical. Since the middle of 2022, partly due to lower buyer expectations, customer satisfaction has rebounded, hitting an all-time high in the second quarter of 2024 and continuing through the third.
The positive market returns in 2024 have been driven by a small subset of very large companies, including sectors not included in the ACSI. The absence of these sub-sectors (such as AI and Microchips) and being underweight in infotech, completely accounted for the ACSI Leader portfolio’s relative underperformance vs the S&P 500. This is further underscored when looking comparatively at the S&P 500 Equal Weight Index, which is only up +12.7% in 2024 – trailing the ACSI Leader portfolio by 10.7% and trailing the S&P 500 by 12.8%.
Despite underperforming the concentrated S&P 500 for the 2024 calendar year, the ACSI-selected leaders closed the year strongly. The ACSI Leader Portfolio closed with 259 basis points of outperformance in the last 6 months of the year and outperformed their S&P sector counterparts in Communication Services (+52.9% vs +40.2%), Consumer Discretionary (+35.4% vs. +30.1%), Consumer Staples (+21.6% vs.+14.9%), and Financials (+31.4% vs +30.6%).
For more information on ACSI as a financial signal, please contact Josh Blechman [email protected].
*The excess return provided from a portfolio of customer satisfaction leaders can easily be verified using publicly available ACSI data.