“The ‘Magnificent 7’ (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) have been outperforming the rest of the market over the past year,” says Paradigm’s retirement-and-income expert Zach Scheidt. 

Since the index bottomed out in October 2022, the Magnificent 7 stocks have led a powerful rally in the S&P 500. (And vastly outperforming the S&P 493 — aka the index’ other stocks).

“Believing these stocks to be overbought, many professional investors unloaded their shares when the market sold off earlier in January,” Zach notes. 

“Of course, the pullback was only temporary and the Magnificent 7 have gone on to new heights, lifting the broad market along with them.” 

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Your Rundown for Wednesday, February 7, 2024...

The S&P 493

The outsized influence of the Magnificent 7 stems from its mammoth market capitalization and the market-cap weighting of the S&P 500 index. 

In other words, the moves of companies with the largest market caps contribute more to the performance of the overall index. All told, the rally in big tech has accounted for a staggering 60% of the S&P 500's gains over the past 12 months.

In that time period, within the Magnificent 7, Nvidia took the crown with a 417% explosion, while Amazon was the laggard with a paltry 38% gain. And thanks to its position as the largest S&P component — with its $2.9 trillion market cap — Microsoft's 79% advance still overshadowed Meta's 198% leap.

To be sure, some smaller stocks including Royal Caribbean (RCL) and General Electric (GE), for instance, have posted stronger price returns of 212% and 160% respectively since the October 2022 bottom. But their tiny market caps limit their impact on the S&P 500's performance to less than 1% each.

Understanding big tech's stranglehold on the index is crucial to interpreting the S&P 500's signals about financial markets and the broader economy. A rising index can mask turbulence when concentrated gains in a handful of mega-cap stocks outweigh declines in most of the other S&P 500 stocks. 

We saw glimpses of this dynamic in March 2023 when banking-sector turmoil sent many stock prices tumbling, even as the S&P 500 managed a 3% monthly gain fueled by enthusiasm around AI advancements at big tech firms.

Recently however, this concentration effect has eased a bit as over 50% of index members now trade above their 2022 peaks. Some analysts argue this broadening indicates the rally has more legs, with previously unloved stocks playing catch-up amid improved economic optimism.

“This impressive rally will eventually run out of steam,” Zach affirms. “But that time hasn’t come yet… 

“For now, the trend is simply too strong. Investors will have to hold their noses, close their eyes and buy the Magnificent 7. Momentum can single-handedly push the Magnificent 7 higher over the next several weeks. That’s just the reality of this market. 

“You might not agree with it,” he concludes, “but I wouldn’t recommend that you fight it.” 

Market Rundown for Wednesday, Feb. 7, 2024

The S&P 500 is up 0.40% to 4,975. 

Oil is up 0.50% to $73.67 for a barrel of WTI. 

Gold is slightly in the red at $2,033.70 per ounce, according to Kitco.

And Bitcoin is up 0.10% to $43,155. 

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