Blame the magnificent seven for recent market bloodletting. There has been growing concern in 2024 that indices have become overly reliant on the seven mega-cap companies – Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta and Tesla. Their outsized influence was made clear on Wednesday as investors digested earnings from Tesla and Google parent Alphabet, with the S&P 500 suffering its worst day since 2022, sliding 2.3 per cent.
The damage was caused by the mega-caps, as evidenced by the Roundhill Magnificent Seven ETF sinking a record 6.1 per cent, compared with a fall of just 1.2 per cent for the S&P 500 minus the seven stocks.
“Concentration risk is clearly a big thing”, says Société Générale’s Andrew Lapthorne. He notes Capital Group research on the so-called ENC index, which refers to the “effective number of constituents” in the S&P 500. When Capital Group’s research was published last year, the S&P 500 wasn’t producing any more diversification than a portfolio of 60 equal-weighted stocks. Since then, the magnificent seven have grown even more dominant.
Consequently, says Lapthorne, today’s number stands at just 49, which is “kinda scary for an index worth over $47 trillion (€43.3 trillion) of market cap”.
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More mag seven earnings reports are coming. Microsoft reports on Tuesday, followed by Meta on Wednesday, and both Apple and Amazon on Thursday. Investors everywhere will be watching, given the mega-caps are dictating the fate of the entire market.
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