By: J. Keith Buchanan, CFA, Senior Portfolio Manager
Ok ok… it may be a little early for the snarky headline. Maybe “A Slightly Less Magnificent 7”?
The nickname’s evolution matters very little to us, but we are paying close attention to the current developments within the companies that have made up the Magnificent 7 stocks. They are NVIDIA, Alphabet, Tesla, Microsoft, Amazon.com, Apple, and Meta Platforms. They earned the moniker last year when the S&P 500 posted a 26% return for the year. The Magnificent 7 accounted for more than 62% of the return. Yes, more than half of the return for the entire index came from seven companies. These companies put the market on their backs coming out of a year to forget in 2022 where US stocks lost ground.
It’s not that these companies are faltering or that their stocks are leading the market lower by any means. We are just taking note of the behavioral shift in leadership in real time. These stocks aren’t propelling the market higher while carrying the deadweight of the other 493 names in the S&P 500 Index as they did throughout 2023. As a matter of fact, only two of the Mag 7, Meta Platforms and NVIDIA, have outperformed the average S&P 500 constituent return as measured by the return of the S&P 500 Equal Weighted Index over the past month.
However, the S&P 500 has made six new all-time highs over that same time period. That implies that the Mag 7 has started to pass the torch, and other names and sectors and industries are pulling more weight. The data has started to bear that out. On the chart below, one can see sector performance relative to the S&P 500 Index. Over the last month, there is delineation between sectors which are pushing the market higher and those pulling it down. Also, the sectors that contain one or more of the Mag 7 stocks are all underperforming. Only two sectors, Health Care and Consumer Staples are underperforming without a Mag 7 stock.
There is a problem with the math here. The four sectors that are currently underperforming for the month, Technology, Communication Services, Health Care, and Consumer Staples comprise about 57% of the S&P 500 Index. The other seven sectors are 42% of the benchmark and have to “run harder” to pull the lagging sectors to new highs.
We are not in any way concerned about the viability of the companies that comprise the Magnificent 7. Each of the companies have provided revolutionary products and/or services to our economy that changed the way society operates in one way or another.
However, given their unprecedented impact on the market as a whole, we remain diligent and focused on the way the stocks are behaving.
Sources: FactSet
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