Stock market analysts have been closely watching “The Magnificent Seven.”
No, not the movie with Yul Brynner and Steve McQueen or the remake with Denzel Washington. Rather, they’re keeping an eye on the seven largest stocks in the S&P 500. Those are, in order of market capitalization (share price times total shares outstanding): Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Tesla and Meta Platforms.
So far this year, this group of mega-sized firms are buoying the performance of the U.S. stock market. Since 2023 began, the S&P 500 has returned 12.4%. That index is weighted by market cap, meaning that larger companies make up a larger percentage of the index.
Over the same period, an equal-weight version of the index, which gives the same slot to each company regardless of size, has gained 0.1%.
The difference is the “Magnificent Seven.” As a group, these stocks have returned 92% in 2023 on average.
Investors may think that means they should be applauding these firms as they ride into town on horseback, and maybe they should. But their dominance may also be a sign that the current bull run is brittle, says Liz Ann Sonders, managing director and chief investment strategist at Charles Schwab.
“It’s not terribly healthy,” she says.
Here’s why.
When just a few stocks like Meta, Nvidia, and Tesla outperform, experts worry about ‘breadth’
What Sonders and other financial experts are concerned with is a measure known as stock market “breadth” — a tool favored by technical analysts to determine the strength or weakness of moves in the stock market.
If a move in the stock market shows broad movement across a wide swath of stocks, then it’s thought to be strong. Trends supported by just a handful of influential stocks tend to be weak.
In a popular analogy for the latter scenario, technical analysts might say that the generals are charging while the soldiers are in retreat.
“Even if the generals are strong on the front line, if the soldiers have fallen way behind, it’s not as strong a front as if you had generals and soldiers on the front line,” says Sonders.
Sonders notes that a certain amount of leadership among the market’s biggest stocks is to be expected. After all, these are the companies that are attracting the most investor dollars.
“It’s more often than not that some of the larger-cap names are going to drive performance,” she says. “It becomes a bigger risk when it’s … dramatic underperformance by basically the rest of the index.”
The risk is that some of those market leaders could come back to Earth, and bring the value of the index down with them, says Liz Young, head of investment strategy at SoFi.
“When you see such a big divergence between things like the equal-weighted S&P and the market-cap weighted S&P, those divergences, when they’re at extremes, are more likely than not to come back into balance,” she says.
‘Investing should be a disciplined process over time, and it starts with a plan’
So what should you do with your money differently now? Nothing too drastic, experts say.
For one thing, breadth is just one stock market measure in a rich constellation that includes interest rates, inflation, bond yields and corporate earnings. Even Wall Street’s most adept stargazers can’t say for certain where stock prices are headed.
That means you’d be wise to avoid trying to time what the market is going to do next, says Sonders.
“When should I get in? When should I get out? Neither ‘get in’ nor ‘get out’ is an investment strategy,” she says. “All that is is gambling on not just a moment in time, but two moments in time. Investing should be a disciplined process over time, and it starts with a plan.”
If you have a plan, stick to it. But make sure you’re adequately diversified, says Young — even if it means focusing less on some of the stocks that you’re familiar with, such as big tech stocks.
“You want to make sure that you’re invested in some stuff that, although you may not be as familiar with it, and it may not sound as interesting and exciting, it’s important to have in the portfolio,” she says. “Because it’s the stuff that is going to probably do better when the rest of what you think is really fun and exciting takes it on the chin.”
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