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Blog Posts — October 3, 2023

Ten charts that show how the ‘Magnificent Seven’ have held sway in the US market

by Diana R. Baechle, PhD

The Magnificent Seven (Amazon, Apple, Google (Alphabet), Meta, Microsoft, Nvidia and Tesla) make up more than a quarter of the US market, and their stellar performance has driven the US market’s outperformance so far this year. But this overblown market concentration is unsustainable and may result in a swift reversal, exposing investors to greater risk.

Investors have been in a tough spot this year, having to choose between partaking in the extraordinary returns of the Magnificent Seven and avoiding the risks that come with an over-concentrated portfolio. Here we look at the impact of the Magnificent Seven on the US market through the lens of ten charts.

Key Takeaways (Click on the subtitles below to jump to each respective section):

  1. The Magnificent Seven stocks drive US outperformances
  2. The stellar performance of seven giants in 2023
  3. Seven stocks represent more than a quarter of the US market
  4. Apple and Nvidia – the largest contributors to US market 2023 gains
  5. Magnificent Seven greatly outperform the US market this year
  6. Increased concentration in US market
  7. Magnificent Seven also outpaces the US in the medium term
  8. Magnificent Seven increased impact on US market’s return
  9. Magnificent Seven’s risk tumbles, mirroring that of the US market
  10. Magnificent Seven contribute more to benchmark risk than their combined weight

1. The Magnificent Seven stocks drive US outperformances

Source: Axioma, STOXX
  • The so-called “Magnificent Seven” – Amazon, Apple, Google (Alphabet), Meta, Microsoft, Nvidia and Tesla – have driven most of the US market’s outperformance to other markets this year.[1]
  • Without these seven stocks, the US STOXX index’s year-to-date (YTD) return (the light blue bar in the chart below) would have been about 4% (instead of 13%), underperforming both Europe and Asia/Pacific.
  • The STOXX US index excluding the Magnificent Seven has had a similar performance to that of the STOXX US Small Cap index and only outpaced Emerging Markets, Canada, China and Asia/Pacific ex-Japan.

[1] The analysis in this study is as of September 26, 2023.

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2. The stellar performance of seven giants in 2023

Source: Axioma, STOXX
  • Nvidia has had an astonishing YTD return of over 180%.
  • Meta more than doubled the value of its stock, and Tesla nearly did it as well.
  • Nvidia and Meta were the best performers not only among the Magnificent Seven, but also among the 600 stocks in the STOXX US index.
  • Microsoft and Apple posted the lowest returns among the seven (slightly above 30%), but they still substantially outperformed the US market as a whole.

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3. Seven stocks represent more than a quarter of the US market

Source: STOXX, Axioma
  • The US market has seen an even stronger concentration in stocks recently, with the Magnificent Seven now accounting for 26% of the weight in the STOXX US index.
  • The aggregate weight of these seven stocks in the US index has increased by 7 percentage points since the beginning of the year.
  • Apple and Microsoft have the largest weights, while Meta and Tesla have the smallest (yet still substantial).
  • A portfolio of the Magnificent Seven, with each company having the same proportional average weight as it did in the STOXX US index since the start of the year, would have the following weights: 28% Apple, 24% Microsoft, 15% Google, 12% Amazon, 9% Nvidia, 6% Tesla and 6% Meta.

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4. Apple and Nvidia – the largest contributors to US market 2023 gains

Source: STOXX, Axioma
  • Among the seven stocks, Apple and Nvidia contributed the most to the YTD return of both the Magnificent Seven portfolio and the US STOXX index (Apple due to having the highest weight, and Nvidia due to posting the largest return).
  • In fact, Apple and Nvidia have each contributed two percentage points to the overall index return (the highest contribution not only among the seven stocks but also among the 600 constituents in the US index).
  • Although 73 companies in the STOXX US recorded much higher returns than Apple, its weight in the index made it the top contributor.
  • The seven companies contributed 10 of the 13 percentage points gained by the US index year-to-date return.

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5. Magnificent Seven greatly outperform the US market this year

  • Even with the significant drop since July, the Magnificent Seven portfolio has had a YTD return of 53%.
  • The seven-stock portfolio outperformed the US market in 2023by 40 percentage points through Sept. 26.
  • In contrast, the STOXX US ex-Magnificent Seven underperformed the STOXX US index by 9 percentage points.
  • Nonetheless, the Magnificent Seven have not only lifted the US market on their way up but they have also considerably weighed on it on their way down during a pullback at the end of the period analyzed.
Source: STOXX, Axioma

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6. Increased concentration in US market

Source: STOXX, Axioma
  • The Magnificent Seven’s aggregate weight has doubled since the beginning of 2018.
  • Apple and Microsoft have maintained the largest weights in the pack.
  • While Meta and Tesla currently have the smallest weights in the STOXX US Index among the Magnificent Seven, Meta’s weight has been relatively constant, while Tesla’s has increased nearly 9-fold since January 2018.
  • The US market continues to see a strong concentration in stocks, with the effective number of constituents [2] in the STOXX US Index at 70, indicating that about a tenth of the stocks in the US index dominate the benchmark.
  • To keep things in perspective: the effective number of stocks was 146 only six years ago (i.e., index concentration has worsened significantly in the last six years[3]).
  • This level of index concentration is quite unusual, and is difficult to maintain over the long run as we have observed in past environments such as the Internet Bubble and the era of Energy dominance.

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7. Magnificent Seven also outpace the US in the medium term

Source: STOXX, Axioma
  • The Magnificent Seven portfolio posted an annualized return for the 2018-2023 period of 24%, outpacing the STOXX US index by 14 percentage points over this period.
  • The seven-stock portfolio started accumulating gains before the pandemic, but in 2020 it recorded a staggering 70% annual return, as increased digitalization propelled the tech-based stocks.
  • 2022 was the only year in recent history when the Magnificent Seven saw significant losses (of 40%) and also underperformed the US market, on the heels of monetary tightening and rate hikes that impacted tech-related stocks in a disproportionate fashion.

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8. Magnificent Seven increased impact on US market’s return

  • The sizable, combined weight of these seven stocks in the US index, together with the stocks’ significant swings, was reflected in the Magnificent Seven’s large contribution to index returns in recent years.
  • In 2020, the Magnificent Seven contributed the most to the index return (13 percentage points), and this represented more than half of the US market’s return.
  • Although this year’s aggregate contribution of 10 percentage points from the seven stocks is slightly lower than that of the pandemic year, it represents nearly 80% of the US index’s YTD return.
  • Apple’s contribution used to dwarf that of Nvidia (10-fold higher in 2018), but for the first time ever, Nvidia’s contribution matched that of Apple this year.
  • Microsoft’s contribution seems to be shrinking, while that of Amazon has oscillated greatly year after year.
Source: STOXX, Axioma

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9. Magnificent Seven’s risk tumbles, mirroring that of the US market

Source: STOXX, Axioma
  • Although it ticked up recently, risk has fallen for both the Magnificent Seven and the US market as a whole since the beginning of the year.
  • Tracking error between the Magnificent Seven and the STOXX US Index has also plunged, suggesting that these seven stocks behave more like the overall US market now than they did at the beginning of the year.
  • The Magnificent Seven’s risk has been mirroring that of the US market albeit at a higher level, as measured by Axioma’s US4 Fundamental Short-Horizon Model.
  • That is to be expected from high-flying names that are typically thought of as being riskier than the overall market. The STOXX US index’s risk profile also benefits from the diversification effect of containing a larger number of stocks.
  • In the aftermath of the COVID pandemic, we saw an extraordinary pattern where the risk of the seven-stock portfolio was remarkably similar to that of the 600-stock US index.
  • This anomaly was short-lived and the risk gap between the Magnificent Seven and the US market widened after the second half of 2020, when the Magnificent Seven’s risk reverted to the historical trend.

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10. Magnificent Seven contribute more to benchmark risk than their combined weight

Source: STOXX, Axioma
  • The seven stocks’ contribution to the STOXX US risk has been consistently higher than their combined weight in the index.
  • This year saw the largest spread between their risk contribution (36%) and aggregate weight (24%).
  • Apple has been the largest contributor to benchmark risk.
  • Tesla and Nvidia saw the largest growth in risk contribution.
  • Nvidia’ risk contribution remained below that of Apple (even though their return contributions were the same this year).

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Conclusion

The dominance of the Magnificent Seven worked in the US market’s favor as long as their performance remained strong. But when they started to slide, as we witnessed since mid-July, this handful of stocks significantly dragged down the US market.

When the Magnificent Seven were on their way up, investors who were not overweight these names struggled. Those who, understandably, eventually capitulated may have been hurt twice as the stocks retreated.

Investors may not want to miss partaking in the astonishing returns of the Magnificent Seven, but they are indeed engaging in a risky bet, particularly in this overly concentrated environment.

When seven stocks make up more than a quarter of the US market, and nearly 40% of its volatility, it represents a substantial risk to benchmarked investors.

In addition, regulators have long had their eye on breaking the monopoly of “Big Tech,” which includes Apple, Microsoft and Google. Moreover, the recent lawsuit alleging an illegal online-marketplace monopoly filed against Amazon by the Federal Trade Commission and 17 US states is yet another blow in the Magnificent Seven’s direction. The scrutiny over the market dominance achieved by some of these companies could result in a requirement for a larger ‘regulatory’ risk-premium for investors choosing to hold them.

For questions or comments about this data, please contact the Qontigo Applied Research team.


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