Dominant Magnificent 7 could lose ground to broader market rally

Levelling the playing field

So far, 2024 has seen the “Magnificent 7” continue to dominate the market, comprising 56.96% of the S&P 500’s returns this year.[1]

Despite drop-offs from Apple and Tesla, the Magnificent 7 has retained its strong influence on the S&P 500 thanks to the other five names – NVIDIA, Amazon.com, Meta Platforms, Alphabet, and Microsoft. If we take these five names, the contribution to the S&P 500’s total return becomes 79.70% – a “Magnificent 5”, perhaps.

This is a continuation of a trend we saw in 2023. As a result, the market is highly concentrated – above historical norms.

For context, the below chart shows the historic total weight of the top 10 constituents in the Russel 3000, and we can see that there have only been a few periods where the weight of the top 10 stocks has exceeded the average.

Source: MEKETA. For illustrative purposes only.

At the same time, the returns are dominated by the top 10 more than ever before – as we can see from the chart below.

Source: MEKETA. For illustrative purposes only.

So, the “Magnificent 5” contributing to almost 80% of S&P 500 returns year-to-date (YTD) creates a concentration risk for investors.

Of course, the dominance of these stocks is not without merit – they are dominating earnings growth. The five names mentioned are projected to be the top contributors to year-over-year (YoY) earnings growth for the S&P 500 in Q1 2024, at 64.3%. Without this contribution, the S&P 500 is forecast to see earnings decline 6%.

Source: FactSet. For illustrative purposes only.

However, there is evidence to suggest that the market is broadening out. As per data from FactSet, if forecasts for the rest of the year are to be believed, the differential should diminish. This would set the stage for a broader market catch up.

Source: FactSet. For illustrative purposes only.

Investors may therefore want to look at equal weighting. Firstly, it will help avoid concentration risk – but it would also provide greater exposure to the rest of the market should performance broaden out.

At the same time. The US economy is continuing to roar ahead. It seems that the US economy is seeing better than expected growth this year, which further increases the likelihood of a broadening out of earnings over the year. Its economy grew above pre-pandemic trend in 2023, which is relatively unique among major economies (barring India). The same cannot be said for China or the Eurozone.

Source: Capital Group; OECD, For illustrative purposes only.

In this scenario, broader exposure via equal weighting may be an option for investors to consider.

A broader market rally among S&P500 stocks may prove positive for equal weighted approaches. HAN-GINS Tech Megatrend Equal Weight UCITS ETF (ITEK) seeks to provide exposure to the disruptive technology companies in “Industry 4.0” that are changing the world through global megatrends. ITEK avoids concentration in larger stocks e.g. FAANGs (Facebook, Amazon, Apple, Netflix, Google) by using a double diversification approach, allocating equal weight to each theme then equal weighting constituents within.

RISKS

Thematic ETFs are exposed to a limited number of sectors and thus the investment will be concentrated and may experience high volatility. Investors’ capital is fully at risk and may not get back the amount originally invested.

Exchange rates can have a positive or negative effect on returns. The value of equities and equity-related securities can be affected by daily stock and currency market movements.

When you invest in ETFs, your capital is at risk.  

[1] HANetf Data; Bloomberg. Data as of 01/05/2024.

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