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Why a Magnificent 7-Day Break Can Be Good for the Stock Market
Top line
David may have just beaten Goliath on Wall Street, a potentially worrying development given the concentration of the recent rally in the world's largest stocks, but research suggests that smaller stocks outperforming the giants may be a healthy development for the market as a whole, at least in the short term.
Stock market rally could broaden.
Highlights
Thursday was the best relative day for small stocks in several years by many measures.
The Russell 2000 index, which tracks 2,000 smaller U.S. public companies with a median market capitalization of $900 million, gained 3.6%, while the tech-heavy Nasdaq 100 fell 2.2%, the second-largest gap in daily returns over the past decade, according to FactSet data, while the 10 largest stocks in the S&P 500 index underperformed the other 490 constituent stocks by the fourth-largest margin in the past 20 years, according to UBS research.
That was notably the worst performance of the “magnificent seven,” the seven AI-heavy stocks like Nvidia and Microsoft that have driven much of the broader rally over the past two years since October 2022, according to Deutsche Bank strategist Jim Reid, with the septet collectively down 4.3%.
The trend of small-cap outperformance continued on Friday, with the Russell 2000 gaining 1.8% and the Russell 1000, which includes the 1,000 largest U.S. stocks, up 0.7%, and the Magnificent Seven stocks advancing an average of 1.1%.
This change does not seem encouraging given the size of the market, but history suggests that further gains are possible.
UBS strategist Patrick Palfrey wrote to clients Friday that during the five most comparable periods in which the 490 smallest stocks in the S&P outperformed the top 10 stocks on a day like Thursday, the S&P gained an additional 4.5% over the following month, despite the top 10 stocks averaging 4.8% declines over the same period.
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Crucial Quote
The performance gap between tech and the rest of the market is so wide that it’s reasonable to expect the gap to continue to close as markets become more comfortable with the idea of a rate-cutting cycle, said Tom Essaye, founder of Sevens Report, noting that in the short term, non-tech sectors could play catch-up. Essaye pointed to Thursday’s strong inflation data, which reinforced calls for an upcoming interest rate cut by the Federal Reserve, which helps most stocks overall but tends to favor some rate-sensitive sectors like real estate.
Large number
33%. That’s how much the Magnificent Seven—Apple, Microsoft, Nvidia, Google parent Alphabet, Amazon, Facebook parent Meta and Tesla—weighted the S&P by market cap as of Thursday’s close, according to FactSet data. In other words, the combined market capitalization of those seven companies, $16.4 trillion, is equal to the total valuation of the 427 smallest constituents in the index.
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What should you pay attention to?
How the budding second-quarter earnings season is affecting the market's perception of the heaviest stocks. The “Magnificent Seven” expect combined annual earnings growth of 27.8% in the period, about five times faster than the other 493 companies that expect earnings expansion of 5.2%, according to Bernstein quantitative analyst Ann Larson.
Further reading
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Sources 2/ https://www.forbes.com/sites/dereksaul/2024/07/12/why-a-magnificent-7-breather-could-be-a-good-thing-for-the-stock-market/ The mention sources can contact us to remove/changing this article |
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