Financial Professionals

December 19th, 2023

The Stock Market Is More Than The “Magnificent Seven”

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The Stock Market is More Than Just the “Magnificent Seven”

In 2023, U.S. stocks posted a strong recovery from last year’s bear market. As I write, the S&P 500 is up over +20% for the year and is approaching the all-time high reached in December 2021.

Many pundits and analysts in the financial media are quick to point out, however, that the U.S. stock market’s returns have been mostly driven by just a handful of stocks, which many are deeming the “Magnificent Seven.” These are companies just about everyone has heard of: Apple, Alphabet (Google), Microsoft, Amazon, Meta (Facebook), Tesla, and Nvidia. Together, these seven stocks make up about 30% of the entire S&P 500’s market capitalization.1

To underscore how influential these seven stocks were on total index returns in 2023, consider that through the end of November, the S&P 500 was up a little under 20% while the Invesco S&P 500 Equal Weight ETF was up slightly less than 4%. The Magnificent Seven were largely responsible for this performance gap.

In fairness, the aforementioned seven stocks have delivered strong earnings growth over the past few years compared to the rest of the index, and profit margins are also well ahead of other companies (in aggregate) in the index. Indeed, the Magnificent Seven’s profit margins are 19% compared to the 9.8% profit margins for the rest of the S&P 500. Forward-looking earnings expectations for the Seven are also far higher than the rest of the index, with 17% long-term earnings-per-share (EPS) growth expected compared to 9% for the remaining 493 companies.

To put it simply, strong earnings and profits get rewarded in the stock market.

But this doesn’t mean investors can just load up on seven stocks and expect to outperform going forward. Experienced investors know that leadership changes hands in the stock market often. What outperforms one year may – and perhaps is even more likely to – underperform the next. Technology’s big run in 2021, for example, was followed by steep declines in the sector in 2022. Outsized gains were followed by outsized losses.

I would also add that the risk/reward profile of the Magnificent Seven stocks became less attractive with such strong performance in 2023, in my view. Both valuations and expectations for future earnings growth have become quite elevated, which creates challenges for future returns. Remember, stocks tend to move most when reality is better than expectations. And if expectations for these seven companies are very high, it could also mean they’re more susceptible to falling short.

I think it’s also important to point out that the recent decline in bond yields over the past few weeks has resulted in a much broader stock market rally, with 2023’s underperforming sectors becoming outperforming sectors. I’ll give you two examples. The S&P 500 real estate sector has been an underperformer in 2023, largely due to rising interest rates. But as pressure on long rates eased over the past few weeks, the S&P 500 real estate sector has powered higher, rising +12% in November alone – its best monthly performance since 2011.

Regional banks are another example of an area of the market that was battered earlier in the year but has posted a sharp rally since the end of October. The KBW Regional Banking Index is up over 20% just in the last month-and-a-half, as investors cheered falling interest rates and the possibility of rate cuts in the new year. The stock market is far more than just the Magnificent Seven.

Bottom Line for Investors

While it is true that the Magnificent Seven has been critical drivers of total return in 2023, I don’t see it as a case for narrowing a portfolio’s focus to just a handful of stocks. As the business cycle evolves, areas of the market that have lagged in recent years – like small-cap stocks, for instance – could be the areas that perform the best going forward. The Magnificent Seven’s stellar performance in 2023, in other words, should not influence you to narrow your portfolio but instead to diversify it even more.

Disclosure

1 Wall Street Journal. December 11, 2023. https://www.wsj.com/finance/rise-in-stocks-bonds-crypto-gold-683f0e91?mod=djemMoneyBeat_us


DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index is a modified market capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The MSCI ACWI ex U.S. Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. The index covers approximately 85% of the global equity opportunity set outside the U.S. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Russell 2000 Index is a well-known, unmanaged index of the prices of 2000 small-cap company common stocks, selected by Russell. The Russell 2000 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The S&P Mid Cap 400 provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

The S&P 500 Pure Value index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
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