The S&P 500 is at a new high, and investors have just a handful of stocks to thank for it.
Change in total market value since Oct. 12, 2022
Source: FactSet
Note: Data is as of market close on Jan. 19.
Since the index hit its latest low in October 2022, seven stocks — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — have collectively risen nearly 117 percent, far outpacing the performance of the other 493 companies in the S&P 500. Together, 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 closing record on Friday. The stock index is weighted by market capitalization, meaning the moves of the largest companies contribute more to the performance of the index. In other words, the influence of these seven stocks comes down to their size. Their market value has risen more than 60 percent since October 2022.
Source: LSEG Data and Analytics
Note: Data is as of market close on Jan. 19.
The outsize impact of the Magnificent Seven can work both ways. During the later months of 2022, their relatively weak showing dragged the S&P 500 down. Over the last twelve months, their gains have accounted for more than 60 percent of the return in the S&P 500. Tesla remains lower than it was when the S&P hit its trough in October 2022, but over the last twelve months, the company has surged more than 64 percent, responsible for nearly 3 percent of the S&P 500 rally on its own.
Indeed, based on price alone, the seven big tech stocks were not the best performing in the S&P 500. Royal Caribbean, the cruise line, rose 212 percent, for example, and General Electric has risen over 160 percent since October 2022. However, these companies hold less weight in the index because they are much smaller, and each is responsible for less than 1 percent of the index’s move since then.
And some of the Magnificent Seven have done better than others. Nvidia, the chipmaker, rose a startling 417 percent, while Amazon gained just 38 percent. Microsoft has risen about 79 percent since the S&P’s low, but because it’s the largest stock in the index, its move still outweighed Meta’s 198 percent gain over the same period.
Change in prices since Oct. 12, 2022
Source: FactSet
Note: Data is as of market close on Jan. 19.
Understanding the dominance of Big Tech on the S&P 500 is important for understanding the signal the index is sending about the market, companies and the economy. A rising S&P 500 is usually seen as a good thing, but when an index is led higher by just a small number of companies, it can mask turbulence beneath the surface. In other words, the index can rise even when a majority of companies fall.
This has always been the case. In the 1980s, companies like IBM, Exxon and General Electric dominated, but never quite to the degree that the new breed of tech behemoths has in recent years.
Last March, a crisis among the nation’s banks sent many individual stock prices tumbling. But the S&P 500 finished the month 3 percent higher, largely because of the furor surrounding advancements in artificial intelligence and what they could mean for the tech giants’ profitability.
This dynamic has begun to subside in recent months, as more companies have joined the rally. More than half the companies in the index are higher than they were when the S&P reached its previous peak in January 2022.
Some analysts say this is a sign that the rally has more room to run as those stocks that have lagged behind begin to catch up, bolstered by greater optimism over the outlook for the economy.
Others warn that it may simply be the rise before a fall, especially as the economy continues to slow, weighing on those same companies.