July 17th, 2023

The Magnificent Seven Threatens To Drag Down Market

The race to 4500 came and went for the S&P 500. Believe it or not, we’re only a stone’s throw from all-time highs at 4818.62. The start of earnings season is showing that it could be the catalyst to get us there. A whole host of economic data helped push the market higher last week with most sectors in the green, but a slowdown is coming, and here is why it could happen before the end of July.

This year, there has been an incredible surge in the stock market for seven prominent companies: Amazon, Apple, Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla. These stocks, sometimes referred to as the Magnificent Seven, have experienced tremendous growth due to the hype surrounding artificial intelligence.

Their performance has been instrumental in driving the market’s overall rally, although, in recent weeks, the market has expanded to include a broader range of stocks, reflecting increased diversity.

The seven companies listed in the Nasdaq-100 accounted for roughly 51% of the index as of June 3. That’s a problem that Nasdaq is looking to fix without changing any of the companies within the index.

The index normally rebalances every quarter, but it will be going through a special rebalance on July 24th.

It wouldn’t come as a surprise if the S&P 500 index undertook its own rebalancing in the near future. The five most influential companies within the S&P 500 are Apple, Amazon, Microsoft, Nvidia, and Tesla. Together, these stocks represent 22.2% of the index’s overall market value.

What will a rebalance do? We won’t see that much of a change as long as more companies participate in the bull market.

But assuming the magnificent 7 continues to lead the rally and push the market higher, we can’t ignore that it will be at a slower pace after a rebalance takes place and their weights are reduced.

While I think we could see a slowdown as a result of the rebalancing, it’s important to remember that stock market index rebalancing is a mechanism designed to maintain the representativeness and integrity of the index.

Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab