The past four years have been fantastic for the stock market. The S&P 500 (SNPINDEX: ^GSPC) has more than doubled in value from the bear-market bottom it sank to in September 2022, in fact, making this one of the faster-moving bull markets in recent history.
It’s no secret why, either. The advent of artificial intelligence (AI) has been a boon for a handful of major technology companies, catapulting their stocks higher. Indeed, AI-driven bullishness is what made the “Magnificent Seven” — Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), Meta Platforms (NASDAQ: META), Microsoft (NASDAQ: MSFT), Nvidia (NASDAQ: NVDA), and Tesla (NASDAQ: TSLA) — so magnificent. With the exception of Tesla, these big tech names were best-positioned to capitalize on the AI revolution that reached critical mass in 2022. (Tesla’s performance stemmed from the fact that the mainstream adoption of electric vehicles also reached a tipping point around that time.)
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As the old adage goes, though, nothing lasts forever. With the dust finally starting to settle, investors can now see just how much of the entire market’s weight these seven stocks have been carrying. Many investors profited from their rise, but now, weakness from them could drag the market’s performance down more than you might expect.
Here’s what you need to know.
Alarmingly overweighted, somewhat overvalued
For the record, there have always been some companies with outsized influence on the S&P 500 — and that’s OK. It’s a market-cap-weighted index, which makes it a pretty accurate representation of the stock market’s collective behavior.
The heroic performances of a small number of stocks over the course of the past four years, however, have skewed the index into a condition that’s dangerously unbalanced. For perspective, because the average Magnificent Seven company has roughly quadrupled in value since 2022’s low, while the typical non-Magnificent Seven S&P 500 name has only gained a little over 80%, data from Yardeni Research indicates those seven megacaps — 1.4% of the 500 companies in the index — now collectively make up 31% of the S&P 500’s total value.
Granted, things aren’t quite as unbalanced as a comparison of just those two numbers implies. These same seven companies are also collectively producing a massive share of the S&P 500’s total earnings.
