The S&P 500 is at a new high and investors only have a handful of stocks to thank for it.
Change in total market value since October 12, 2022
Source: data set
Note: The data corresponds to the market close on January 19.
Since the index hit its latest low in October 2022, seven stocks: Alphabet, Amazon, Apple, Goal, microsoft, NVIDIA and tesla – have collectively risen nearly 117 percent, far outperforming the other 493 companies in the S&P 500. Collectively, these stocks have become known as the “Magnificent Seven.”
But it’s not just the stellar price performance of these stocks that helped lift the S&P 500 to a record close on Friday. The stock index is weighted by market capitalization, meaning that moves by larger companies contribute more to the index’s performance. In other words, the influence of these seven actions comes down to their size. Its market value has increased more than 60 percent since October 2022.
Source: LSEG data and analysis
Note: The data corresponds to the market close on January 19.
The enormous impact of the Magnificent Seven can work both ways. During the final months of 2022, its relatively weak performance dragged the S&P 500 lower. Over the past twelve months, its earnings have accounted for more than 60 percent of the S&P 500’s performance. Tesla is still lower than it was when the S&P hit its bottom in October 2022, but over the past twelve months, the company has risen. more than 64 percent, alone responsible for almost 3 percent of the S&P 500’s rally.
In fact, based on price alone, the seven big tech stocks haven’t performed the best in the S&P 500. Royal Caribbean, the cruise line, is up 212 percent, for example, and General Electric is up more than 160 percent. percent since October 2022. However, these companies have less weight in the index because they are much smaller and each is responsible for less than 1 percent of the index’s movement since then.
And some of the Magnificent Seven have fared better than others. Nvidia, the chipmaker, rose a whopping 417 percent, while Amazon gained just 38 percent. Microsoft is up about 79 percent from the S&P’s low, but because it’s the largest stock in the index, its move still outpaced Meta’s 198 percent gain over the same period.
Price change from October 12, 2022
Source: data set
Note: The data corresponds to the market close on January 19.
Understanding Big Tech’s dominance in the S&P 500 is important to understanding the signal the index sends about the market, companies, and the economy. A rising S&P 500 is often seen as a good thing, but when an index is driven higher by only a small number of companies, it can mask turbulence beneath the surface. In other words, the index can rise even when most companies fall.
This has always been the case. In the 1980s, companies like IBM, Exxon and General Electric dominated, but never as much as the new generation of technology giants have done in recent years.
Last March, a crisis among the country’s banks sent down the prices of many individual stocks. But the S&P 500 ended the month up 3 percent, largely due to the furor around advances in artificial intelligence and what they could mean for the profitability of tech giants.
This dynamic has begun to slow in recent months, as more companies have joined the rally. More than half of the companies in the index are higher than they were when the S&P hit its previous high in January 2022.
Some analysts say this is a sign that the rally has more room to continue as stocks that have lagged behind begin to regain ground, driven by greater optimism about the economy’s prospects.
Others warn that it may simply be a rise before a fall, especially as the economy continues to slow, weighing on those same companies.
