February 25, 2024

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History shows that stocks will continue to rise even if the “Magnificent Seven” loses steam

History shows that stocks will continue to rise even if the “Magnificent Seven” loses steam

The S&P 500 (^GSPC) hovers above 5,000 for the first time ever. Once again, the stocks leading it higher are the largest members of the benchmark average.

Amazon (AMZN), Meta (META), Microsoft (MSFT), and Nvidia (NVDA) returned nearly 20% to start the year, according to analysis from Jared Blecker from Yahoo Finance. The returns from these four stocks alone represent nearly 69% of the S&P 500's gains this year.

But not all of the so-called “magnificent seven” tech stocks are off to a strong start. Apple (AAPL), Alphabet (GOOGL, GOOG), and Tesla (TSLA) have had a choppy start to the year. For some on Wall Street, this has become a concern as a shrinking number of stocks drives the major average higher.

Fortunately for investors, even if rising stocks peak, the market… Maybe it should still go up.

A recent analysis by BMO Capital Markets' chief investment strategist, Brian Belsky, shows that even when large stocks driving a significant portion of market action decline, index returns over the following year historically It was very good.

A graph from Belsky shows that since 1992, On average, the S&P 500 rose 14.3% during the year after the peak contribution from the 10 largest stocks averaged the benchmark. The only time the S&P 500 had a negative return in the following year was in 2001 amid the fallout from the tech bubble.

“While some investors may worry that the market is likely to suffer without these stocks leading the way, our analysis shows that the S&P 500 has performed well after the peak in the relative performance of the 10 largest stocks,” Belsky wrote in a note to the Journal. customers on Tuesday.

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Ben Snyder, equity strategist at Goldman Sachs, noted that while the degree to which the… Stocks are dragging the major index higher and are currently abnormally high, and the idea of ​​a few winners driving the S&P 500's gains is not a new concept. In fact, Snyder said, it has long been a typical feature, not a bug, of the benchmark.

“That's part of the reason why the S&P 500 or the U.S. stock market broadly has been so strong over the years. … New companies grow, they become more weighty in the index, and they drag the market higher with them,” the analyst says. He told Yahoo Finance. “Eventually, there will be disruptive factors, new technologies and new companies that will emerge. Those will become larger. And then, it will be their turn to pull the market higher.”

For the S&P to hit new records without significant contributions from the Big 7, there must be an expansion in the market, as other lagging sectors begin to gain strength. This has been seen recently in areas like large-cap healthcare (XLV), which is up 17% from its October lows, and the Select Financial Sector ETF (XLF), which is up 24% from its October lows.

With 70% of S&P 500 companies beating analysts' earnings per share expectations in the fourth quarter, above the historical average of 63%, Ohsung Kwon, equity strategist at Bank of America in the US and Canada, noted increased breadth. Earnings growth as a positive incentive. straight ahead.

“you see [an] Higher percentage [of] “Companies are reporting positive earnings this quarter compared to last quarter. In fact, the earnings range is improving as well, and this is a positive cycle for stocks,” Kwon told Yahoo Finance on Tuesday.

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Snyder believes this expansion is the most likely scenario this year once investors feel more confident in the Fed's rate-cutting path.

“As investors stop worrying so much about exactly when the Fed is going to start cutting interest rates, I think we're going to see a lot of these companies outside of the Big 7 have very strong earnings growth, and that will do very well next year. In turn, Snyder said.

SANTA CLARA, CA - FEBRUARY 5: A sign is placed at Nvidia's headquarters on February 05, 2024 in Santa Clara, California.  Nvidia shares reached record highs on Monday after analysts increased their expectations for the company.  (Photo by Justin Sullivan/Getty Images)

A banner is placed at Nvidia's headquarters on February 05, 2024, in Santa Clara, California. (Justin Sullivan/Getty Images) (Justin Sullivan via Getty Images)

Josh Schaeffer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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