A market hooked on a handful of mega-cap stocks is a precarious place to be.
By rich wolf for WOLF STREET.
The Russell 2000, which tracks the smallest 2000 stocks in the Russel 3000, fell 1.6% on Friday, was in the red so far this year, returned to where it had first been in January 2021 and is down a 18% with respect to all its values. -All-time high in November 2021 (data via YCharts).
But the Nasdaq Composite It notched its fifth straight record close on Friday and was up 9.1% from its previous cycle high in November 2021, having risen 73% from the December 2022 low. Just another day in a hyper-precarious situation. stock market where the entire world has driven a handful of huge multi-billion dollar stocks into a frenzy (all data here via Y Charts).
The S&P 500 index is now governed by a board of three stocks with a combined market cap of nearly $10 trillion (Nvidia, Apple and Microsoft) and three other stocks with a combined market cap of $5.4 trillion (Amazon, Alphabet and Goal). Those six stocks combined have a market capitalization of $15.2 billion.
The roughly 503 stocks in the S&P 500 combined have a market capitalization of about $45 trillion. Without those six stocks, the S&P 497 would have a market cap of $30 trillion. This entire market lives and dies on these six stocks. A fund that mirrors the S&P 500 has a third of its holdings in just six stocks. Forget about diversification?
So the S&P 500 was just a hair in the red on Friday, already a hair away from its all-time high, up 13.3% from its previous cycle high on January 3, 2022, with a big trough in between.
The S&P 500 Equal Weight Index It is not weighted by market capitalization. It contains the same stocks as the S&P 500 index, but all stocks weigh the same within the index. The purpose is to see if the performance of a small number of outliers with huge market caps is driving up the overall S&P 500 index and is, in fact, masking what is happening to the rest of the market. And that is the case.
The index fell 0.7% on Friday, down 3.8% from its all-time high on March 28 and back to where it was for the first time on January 4, 2022.
year to date: So far in 2024, the Russell 2000 (red) is down 1%; the S&P 500 Equal Weight (maroon) rose 3.4%, while the S&P 500 (purple) rose 13.9% and the Nasdaq Composite (light blue) rose 17.8%.
So that's a very curious division in the stock market:
The Mag 7 is now a misnomer. Tesla left the group. Its market cap plummeted 56% from its all-time high to $557 billion, less than half the market cap of Meta, which is the next smallest in line with a market cap of $1.28 trillion. of dollars. But to revel in nostalgia, we'll keep Tesla in the box below (green).
What happened to Tesla (a 56% drop from the peak and a 75% drop at one point) can happen to any of the Mag 7s.
In 2023 and so far in 2024, Tesla is up 44%, which is still a huge increase in normal times, but it is the smallest increase of the Mag 7.
The Mag 7, in 2023 and so far in 2024:
- NVIDIA [NVDA]: +802%
- Goal [META]: +319%
- Amazon [AMZN]: +119%
- Alphabet [GOOG]: +101%
- microsoft [MSFT]: +84.6%
- Apple [AAPL]: +64%
- tesla [TSLA]: +44%.
Five of these Mag 7s are the largest stocks in the universe in terms of market value. The entire world is now invested in them. They move the needle enormously, and they do so even when the rest of the market is pulling against them. Having the big indices โ and portfolios โ tied to just a handful of stocks is a very precarious place. But that's what it is.
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