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The S&P 500 is at new all-time highs, and there are only a handful of stocks that investors can thank for this.
Since the index’s latest low in October 2022, seven stocks have collectively risen more than 110%: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla, and 493 other S&P 500 stocks. This significantly exceeds the company’s performance. Together, these stocks became known as the Magnificent Seven.
But it wasn’t just the stellar stock performance of these stocks that pushed the S&P 500 to an all-time high at Friday’s close. Stock indexes are weighted by market capitalization, meaning that the movements of the largest companies contribute significantly to the index’s performance. In other words, the influence of these seven stocks depends on their size. Their market value has increased by more than 60% since October 2022.
The enormous impact of The Magnificent Seven works in both directions. The S&P 500 index declined as a result of relative weakness during the latter months of 2022. Over the past 12 months, their gains accounted for more than 60% of the S&P 500’s returns.
In fact, based on price alone, the seven big tech stocks aren’t the best performers in the S&P 500. Cruise company Royal Caribbean rose 212% between October 2022 and Friday, while General Electric rose more than 160%. However, these companies are much smaller and contribute less than 1% of the index’s changes since October 2022, so they have a lower weight in the index.
Some of the Magnificent Seven did better than others. Chipmaker Nvidia is up an astonishing 417% from October 2022 through Friday, while Amazon is up just 38%. Microsoft rose about 79%, but as the largest stock in the index, its move still outpaced Meta’s 198% rise over the same period.
Understanding Big Tech’s dominance in the S&P 500 is important to understanding the signals the index is sending about markets, companies, and the economy. While a rise in the S&P 500 index is usually seen as a good thing, when the index is driven up by a small number of companies, it can mask turmoil beneath the surface. In other words, the index can rise even if the majority of companies fall.
This has always been the case. In the 1980s, companies like IBM, Exxon, and General Electric were dominant, but not as much as the new breed of giant technology companies of recent years.
In March, many individual stock prices fell due to the domestic banking crisis. However, the S&P 500 Index ended the month 3% higher. This is largely due to the buzz around advances in artificial intelligence and its impact on tech giants’ profitability.
The dynamic has begun to subside in recent months as more companies join the rally. More than half of the index’s constituents are higher than the S&P’s previous all-time high in January 2022.
Some analysts say this is a sign that there is more room for the rally as optimism about the economic outlook grows and laggards are starting to catch up.
Some warn that this may simply be the rise before the fall, especially as the economy continues to slow, weighing on these same companies.
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