The Magnificent Seven Tech Stocks Drive the Stock Market Higher
The S&P 500 is now hovering over 5,000 points for the first time ever, driven by the biggest members of the benchmark average, namely Amazon, Meta, Microsoft, and Nvidia, which have provided a significant return of nearly 20% since the beginning of the year. These four stocks alone account for approximately 69% of the S&P 500’s overall gain in 2023, as reported by Yahoo Finance’s Jared Blikre.
Concerns over Choppier Performances
However, not all of the so-called “Magnificent Seven” tech stocks have experienced a strong start. Apple, Alphabet (GOOGL, GOOG), and Tesla are facing a choppier start to the year, causing some concern among investors as a smaller number of stocks are pushing the major average higher.
The Market’s Resilience
Despite this, historical analysis by BMO Capital Markets chief investment strategist Brian Belski indicates that the S&P 500 historically performs well even when the top contributing stocks fall off. Since 1992, the S&P 500 has delivered an average 14.3% increase in the year following a peak in contribution from the top 10 stocks in the benchmark average, with the exception of the negative return in 2001 stemming from the tech bubble fallout. Belski states, “our analysis shows that the S&P 500 has performed just fine following peaks in relative performance of the 10 largest stocks.”
Top Stocks Leading the Index Higher
Goldman Sachs equity strategist Ben Snider highlights that while the current level of top stocks driving the major index to new highs is unusually high, the notion of a few winners leading the S&P 500’s gains is a recurring characteristic, ultimately benefiting the benchmark index. New companies emerge and grow, becoming larger weights in the index, driving market expansion. As Snider emphasizes, “And eventually, there will be disruptors and new technologies that emerge and new businesses that emerge. And those will become larger. And then, it will be their turn to drag the market higher.”
Looking for Broad Market Expansion
For the S&P 500 to continue reaching new records without significant contributions from the Magnificent Seven, a broadening out of the market is necessary, with other lagging sectors gaining momentum. Recent examples of sectors rebounding include large-cap Healthcare (XLV), which has surged 17% from its October lows, and the Financial Select Sector ETF (XLF), which has gained 24% from October lows.
Increase in Earnings Breadth Reinforces Optimism
With 70% of S&P 500 companies surpassing analysts’ earnings per share forecasts in the fourth quarter, surpassing the historical average of 63%, there is increased breadth in earnings growth. This positive catalyst, pointed out by Bank of America US and Canada equity strategist Ohsung Kwon, reinforces a favorable outlook for equities. According to Kwon, “You’re seeing [an] even higher percentage [of] companies posting positive earnings this quarter than last quarter. So actually, earnings breadth is improving as well, and that’s a positive cycle for equities.”
Broad Market Outlook
Snider believes that as investor concerns about the Federal Reserve’s interest rate-cutting trajectory diminish, this year will likely showcase strong earnings growth for companies outside of the Magnificent Seven. These companies have the potential to perform well, reflecting a broadening out of the market with a positive impact on market performance.
Josha Schafer is a reporter for Yahoo Finance. Follow him on @_JoshSchafer.
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