It probably isn’t news to investors that a few big stocks have driven much of the strong performance in the market this year—but the extent to which the S&P 500 index is top-heavy deserves a deeper look. It might even be a macro issue at this point.
The so-called Magnificent Seven—
Apple,
Alphabet,
Amazon.com,
Meta Platforms,
Microsoft,
Nvidia,
and
Tesla
—have been a key force pushing the
S&P 500
more than 5% higher this year after a strong finish to 2023. The investor frenzy over artificial intelligence, in particular, has helped chip maker
Nvidia
and other AI-exposed companies like Meta notch double-digit percentage-point gains in just weeks.
The market capitalization of these stocks has swollen at a much faster rate than the other 493 names in the S&P, causing the index to be extremely concentrated. In fact, the index is now at its most concentrated in at least the last century, according to
Deutsche Bank
strategist Jim Reid, who said you’d have to look to the bubble of 1929 to see when so few stocks had such high weightings in the wider market.
Stock market concentration at such levels goes beyond a quirk—and warrants macroeconomic consideration because of how much the fate of these few companies impact overall sentiment, according to Reid.
“There is little doubt that the performance of the Magnificent Seven stocks in recent months, and indeed years, has hugely impacted the macro environment,” Reid wrote in a Tuesday note. “Without their dominance, the U.S. stock market and global sentiment would look very different. In turn, their future performance will likely impact the majority of global assets to some, or to a great, degree going forward.”
Indeed, the market cap of the Magnificent Seven alone would make it the second-largest national stock market in the world, according to Deutsche Bank, and double the size of Japan in fourth. The market caps of
Apple,
Microsoft,
the stock markets of Saudi Arabia, and the U.K. are all fairly similar, too.
And the concentration of the Magnificent Seven may grow further if the Federal Reserve continues on the path of monetary policy that investors expect by cutting interest rates significantly this year, which could put this group of stocks into even sharper focus.
Stock market concentration tends to be greater when bond yields are lower, according to Deutsche Bank. The benchmark 10-year U.S. Treasury yield rose to its highest level since the 2008-09 financial crisis as the Fed raised rates to a generational peak, and is expected to fall as the Fed likely cuts rates in the months to come.
This could boost the market caps of the Magnificent Seven as a matter of valuation since these stocks are growth names, valued based on earnings expected years into the future. Lower yields tend to boost the present value of future cash flows, and investors are already forecasting that Nvidia’s earnings, for instance, will outpace that of the wider market.
Deutsche Bank sees a number of factors that support—or challenge—the continued growth of the Magnificent Seven. The former camp includes optimism that this group of stocks has global reach and high innovation power, earnings that already outpace profits of many large countries, the support of the U.S., and that AI is just in its infancy. In the latter camp is pessimism over regulatory actions against Big Tech and public scrutiny against AI, geopolitical risks, and rapid tech changes that could turn against the Magnificent Seven, which are valued as if they will always win.
“Whether you think they remain a compelling investment case or whether you believe they are strongly overvalued, one thing is certain,” wrote Reid. “It’s impossible in any asset class to ignore their influence.”
Write to Jack Denton at [email protected]
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