From “Nasdaq”:

Earnings reports from the “Magnificent Seven” tech stocks have renewed focus on their outsize weighting in the S&P 500. Their strength is pushing the index to record highs. Yet, growth concerns and its high market values have led to analysts questioning its influence. As a result, the Nasdaq index is market cap-weighted, and concern is growing about these tech giants’ dominance.

The strong performance of the “Magnificent Seven” stocks, including Alphabet, Amazon, Microsoft, and Tesla, has been a driving force in the S&P 500. Their influence accounted for nearly 29% of the S&P 500, and their weakening could impact the broader indices, particularly if the tech sector faces a significant pullback. Microsoft and Alphabet already saw a decline in their shares in early 2024, following the release of their quarterly earnings.

Despite their recent share-price nadir, the “Magnificent Seven” are still holding on to their year-to-date gains. The seven stocks represent 28.6% of the S&P 500, close to their highest weight ever, and were collectively responsible for 62% of the S&P 500’s total return. The soaring performance of these stocks has created a more challenging environment for active fund managers, who seek to beat major market indexes. Last year, only 23% of large-cap funds benchmarked against the Russell 1000 managed to outpace the index.

The increasing concerns about concentration and the firm’s relatively high sway in benchmarks may further invigorate “Magnificent Seven” stocks and drive indexes higher. However, the concern is that the market is very concentrated in them, which worries some investors, although these stocks are strong companies that dominate their niches. The “Magnificent Seven” collectively account for nearly 20% of the market cap of the MSCI’s world equities index, making them an influential force in global markets.

The “Magnificent Seven” stocks could see more volatility later this week, when three of them- Apple, Amazon and Meta- report quarterly results. Stellar reports from these companies could further invigorate their stocks and drive indexes higher. Despite the searing concern, Chuck Carlson, chief executive at Horizon Investment Services, believes that diversified funds will continue struggling as long as there are only a few companies leading the way in the market.



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