The Magnificent Seven Are At It Again. Other Stocks Are Just Living in It.

In the current year, major technology stocks have once again seized the spotlight as the market's frontrunners. The collective performance of the renowned "Magnificent Seven"—comprising Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Tesla, and Meta Platforms—has witnessed an impressive 75% surge in 2023. This surge has significantly outpaced the remaining 493 companies in the S&P 500, which experienced more modest gains of 12%. Consequently, the Magnificent Seven now constitutes approximately 30% of the S&P 500's total market value, approaching historically high levels for such a small group of stocks.

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Goldman Sachs Global Investment Research notes the substantial impact of these tech giants on a global scale. Within the MSCI All Country World Index, which purportedly encompasses around 85% of the global investible equity market, the combined weighting of the Magnificent Seven surpasses that of all stocks from Japan, France, China, and the U.K. combined.

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While the remarkable outperformance of these tech stocks has fueled optimism, concerns about market concentration persist. The market becomes more susceptible to downturns when a handful of stocks contribute disproportionately to its gains. This vulnerability was evident last year when big tech stocks experienced a significant decline as the Federal Reserve raised interest rates. As interest rates increased from near-zero levels, tech and other growth stocks faced competition from less risky investments.

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Contrary to expectations, the Magnificent Seven rebounded in 2023, defying a banking-sector crisis, concerns about government debt default, and geopolitical conflicts in the Middle East and Europe. The resurgence was attributed to the widespread excitement surrounding artificial intelligence and the anticipation of substantial future profits from these companies. Additionally, strong economic data and easing inflation contributed to the belief that interest rates had peaked, further boosting tech stocks.

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Leading the charge, Microsoft surged by 55%, Apple added 52%, and Nvidia's shares more than tripled, propelling its market value above $1 trillion. However, a mere 23% of S&P 500 stocks are within 10% of their record highs, despite the index being just 1.6% away from its January 2022 peak.

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The Magnificent Seven's influence extends beyond price performance; they significantly contribute to the market's overall earnings growth. While S&P 500 companies are expected to see a modest 0.7% earnings increase this year, excluding the Magnificent Seven would result in an anticipated 4% decline, as per TradeAlgo.

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Analysts differ in their predictions for tech stocks' dominance in the coming year. Some believe that sectors like industrials, materials, and transportation will outperform, while others recommend increasing positions in selective small-caps and emerging markets. A shift towards a more normalized market environment, where previously overlooked sectors regain prominence, is anticipated.

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Despite the resurgence of big tech, certain stocks, including Amazon, Alphabet, Meta, and Tesla, are still trading below their 2021 year-end levels. Investor caution is reflected in the data, showing a net addition of $4.1 billion to tech-focused equity funds through November—half of the $7.9 billion pulled in the same period in 2022, according to Refinitiv Lipper data.

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Higher interest rates have played a role in the tech stocks' resurgence, enabling them to earn yields on cash for the first time in decades. This development has strengthened their balance sheets and bolstered profitability. While tech stocks may appear expensive compared to the broader market, proponents argue that their reliability as growers makes them a worthwhile investment, particularly in a slowing economic environment.