The More Things Change, the More they Stay the Same
Posted on December 5, 2024 in Investment Strategy
As of Tuesday’s (December 3rd) close, the S&P 500 had appreciated about 27% for the year, excluding dividends. About half of that increase (13%) was attributable to the Mag 7 stocks. The heavy contribution from the Mag 7 reflects both a large weighting in the index (27.9% at the end of 2023) as well as their huge outperformance relative to the remaining 493 stocks. The average Mag 7 stock is up over 57% this year compared to an average increase of a little over 19% for the average non-Mag 7 stock in the S&P 500. The increases range from 15% for Microsoft to 183% for Nvidia.
What would happen to S&P 500 performance if we assume that the Mag 7 stocks performed in line with the other 493 stocks in the index? I have a chart for that too. Rather than producing a 27% year-to-date increase, the index would have been up only about 18% (orange line). That’s still pretty darn good. If we assume that the Mag 7 stocks were collectively flat for the year, the S&P 500 increase would fall to only 14%. Still pretty solid.
But the punchline for this analysis is that the Mag 7 stocks continue to be incredibly influential to perhaps the most widely followed global stock index. And as their outperformance continues, their influence keeps growing to new heights. As of the close on Tuesday of this week, The Mag 7 weighting in the S&P 500 was 32.2% compared to just 27.9% at the end of 2023. In other words, if you decide to buy an S&P 500 index ETF, which is a passive investment vehicle that tracks the performance of the S&P 500, nearly a third of your investment dollars will go into these seven stocks while the remaining 493 stocks will have an average weighting of 0.14%. Do investors know that’s what they are signing up for? My guess is many do not.
We continue to believe that most of the opportunities going forward reside outside of the Mag 7. They’ve had an incredible run, but their massive size is increasingly running up against the law of large numbers.
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