Most of S&P 500’s Gains Driven by 7 Firms, Others up Less Than 5% YTD

Most of the S&P 500's rally comes from the top 7 components, suggesting a notably lopsided US equity market.

The S&P 500 has rallied over 12% year-to-date, but recent analysis showed that over 50% of its gains came from the index’s top 7 biggest stocks. On the other hand, the remaining 493 companies have advanced just 5%, suggesting a significantly lopsided market. 

‘The Magnificent Seven’ Accounted for Over 50% of S&P 500’s Gains in 2023

The S&P 500 – the stock market index that tracks the performance of the largest US-listed 500 companies – is up around 12.5% in 2023, marking a significant rebound from the 2022 lows. Although this performance is impressive, a recent analysis by stock market strategists pointed to certain risks associated with the rally. 

Notably, the analysis showed that the S&P 500’s 2023 ascent has been driven mainly by its 7 most significant components, also known as ‘The Magnificent Seven.” These refer to the 7 most extensive mega-cap technology stocks, including Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), Meta (NASDAQ:META), and Tesla (NASDAQ:TSLA). 

According to the data, these 7 stocks collectively gained over 50% year-to-date, while the remaining 493 companies tracked by the index rose just 5%. Put differently, the index’s current rally is more than halved when the 7 tech giants are excluded. 

“The bottom line is that if you buy the S&P 500 today, you are basically buying a handful of companies that make up 34% of the index and have an average [price-to-earnings] ratio around 50.”

– said Torsten Slok, chief economist at Apollo Asset Management.

The Magnificent 7 comprise 28% of the S&P 500 index, with their combined weight being greater than any combined weight of the top 7 companies tracked by the index before the beginning of the 21st century. These corporations have a combined market cap of around $10.5 trillion, with the top 3 being Apple ($2.7 trillion), Microsoft ($2.3 trillion), and Alphabet ($1.6 trillion.)

Market Concentration Points to Risks for Broader US Equity Market

However, the aforementioned data does not come as a surprise, given that market strategists have been warning about the risks of a lopsided stock market for months.

The uprise of The Magnificent Seven and the stock market indexes this year is primarily driven by the ongoing artificial intelligence (AI) boom, fueling the S&P 500 and Nasdaq Composite’s outperformance compared to other major indices like DJIA and Russel 2000. 

And while the valuation discrepancy between these companies and the rest of the US equity market did not pose many risks, it could lead to further losses now that stocks are feeling the pressure from rising Treasury yields, BTIG’s Jonathan Krinsky warned. In addition, a potential slowdown in AI growth or worsening macroeconomic conditions could cause volatility among the 7 mega-cap stocks and ultimately undermine the S&P 500’s overall rally.