Why do people use the S&P 500 as a proxy for equity performance instead of tracking the returns of all equities? Would the S&P 500 tend to overstate equity returns by excluding smaller/arguably lower quality stocks? So why are fund returns usually compared to the S&P 500?

Yeah, as wellendowed says, the S&P500 is actually a moderately generous benchmark, as it it includes highest market-cap stocks, which tend to under-perform (smaller performs better. Maybe; the evidence is starting to suggest that this relationship is much weaker when you correct for survivor bias). That said, there are reasonable reasons to use the S&P 500 as a benchmark. It is the index that most people would track with an index fund.

S&P 500

wellendowed

Monkey

According to the size premium it would understate returns

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Markov

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