The Magnificent Seven Propels S&P 500
According to research from Deutsche Bank, U.S. stock gains, as measured by the S&P 500 index, have surpassed cash-like government bonds on a total return basis since the end of 2021. This shift can be attributed to the remarkable performance of the so-called “Magnificent Seven,” which refers to big-tech equities. Jim Reid, head of global economics and thematic research, noted that this time frame encompasses the entire period of higher interest rates and yields resulting from the Federal Reserve’s monetary tightening.
While the Fed was combating high inflation with aggressive rate hikes, the S&P 500, a well-known benchmark for large-cap stocks in the U.S., has rebounded from its losses suffered in 2022. Notably, the index has been bolstered by significant gains in several megacap stocks within the Magnificent Seven. In contrast, U.S. small-cap stocks represented by the Russell 2000 are currently experiencing challenges.
Following a substantial 5.45% climb in the Magnificent Seven on Friday, which was deemed as “the biggest gain in exactly a year,” the S&P 500 has finally surpassed an index of one-month to three-month Treasury bills on a total return basis since the start of 2022. This achievement coincided with the surge in yields earlier this year.
In response to surging inflation, the Fed initiated rate hikes in March 2022, leading to losses in both stocks and bonds as Treasury yields surged. Consequently, investors sought refuge in the higher yields of ultra-short-term Treasurys, or T-bills, amidst market volatility.
However, the outlook is changing as investors now anticipate rate cuts from the Fed. Inflation has significantly eased from its peak in June 2022.
Jim Reid observed, “When you consider that the long-run real return for the S&P 500 is around 6% per annum and that inflation has been a cumulative 10% over that 2-year period, you could argue that the S&P 500 should now be over 20% higher just to have tracked normal long-term trends.”
Read: ETF investors abandoned cash-like bonds in January, favoring stocks and fixed income alternatives.
Market Volatility Continues as Megacap Stocks Soar
In recent times, it may be easy to overlook the fact that the Meg Seven stocks experienced a significant decline in 2022 before their remarkable recovery. The group of megacap stocks comprises Apple Inc., Microsoft Corp., Google parent Alphabet Inc., Amazon.com Inc., Nvidia Corp., Facebook parent Meta Platforms Inc., and Tesla Inc. These stocks have all seen substantial gains in 2023. While Tesla and Apple have yet to enter positive territory this year, Nvidia and Meta have stood out with their remarkable returns in early 2024.
Together, these seven stocks hold a dominant position in the S&P 500 index, which reached a new record high on Friday.
According to experts, the prevailing factor for equities is ultimately economic growth. However, there are concerns that the ideal scenario of robust growth combined with aggressive rate cuts seems less likely following Friday’s market performance. While smaller companies are expected to be more sensitive to these developments, the Meg Seven stocks will likely remain insulated and continue to dictate the overall direction of the index.
At midday on Monday, U.S. stocks had declined, with the S&P 500 falling by 0.5%, the Dow Jones Industrial Average dropping by 0.9%, and the tech-heavy Nasdaq Composite shedding 0.5%, according to FactSet data. On a more positive note, based on midday trading levels, the price of the S&P 500 index has risen by over 3% this year.
Meanwhile, small-cap stocks have struggled, with the Russell 2000 down by a sharp 1.7% in midday trading on Monday, resulting in a year-to-date drop of almost 5%.
In the bond market, the three-month T-bill yield was around 5.37% at midday, while the 10-Treasury yield was trading 13 basis points higher at approximately 4.16%, according to FactSet data.