Broader Equity Market Participation Maybe Unfolding
By: David I. Templeton, CFA, Principal & Chief Investment Officer
Author: David I. Templeton, CFA, Principal and Portfolio Manager
One aspect of the equity market advance over the last few years is the advance has been driven by a small number of stocks. This group of stocks is referred to as the Magnificent 7 and in fact an exchange traded fund tracks this basket, Roundhill Magnificent Seven ETF (MAGS). In our Winter Investor Letter we noted the Mag 7 stocks accounted for just over 50% of the return of the S&P 500 Index. A broadening of returns has occurred in fits and starts over the last year as we highlighted the broadening market participation mid-year last year. Although a short time period, since mid-December last year, the Mag 7 stock performance has trailed the performance of the broader market.
Additionally, as the below chart shows, the weighting of the largest 10 stocks, which includes the Mag 7 stocks, in the S&P 500 Index now stands at a record high. As is said at times, trees do not grow to the sky, i.e., this kind of growth will not go unchecked forever.
In reviewing the sector performance of the S&P 500 Index one sees seven of the eleven sectors are outperforming the S&P 500 Index to date in January with the Technology sector performance near the bottom. For all of 2024, only four sectors outperformed the overall index return.
Also worth noting is which sectors have a larger percentage of stocks outperforming the S&P 500 Index itself as seen below. For all of 2024, Energy, Health Care and Materials sectors were at the bottom of performance for the year; however, stocks within those sectors appear to be attracting investor attention this year.
Lastly, the recent market advance that has unfolded since January 10 has seen the S&P 500 Index reach a record high, yet the advance decline line in the top panel below has not followed suit. From a positive perspective the line is trending higher so advancing issues lead declining ones, however, if this line would reach a new high, it would be one indicator that confirms the market's recent high and on expanding breadth.
In summary, the market advance these past two years has occurred on narrow breadth and the narrowness has been concentrated in the Magnificent Seven stocks. Fourth quarter 2024 earnings reporting season is well underway and four of the Mag 7 report this week, Microsoft (MSFT), Meta Platforms (META), and Tesla (TSLA) after the close on Wednesday and Apple (AAPL) reports after the close on Thursday. These earnings reports will be important, and more so the guidance. The reports come on top of the heightened focus over the weekend on the Chinese AI Model DeepSeek. It seems this program effectively competes with the more complex Open AI and does not require Nvidia's (NVDA) most advanced chip. DeepSeek interest may create some headwind for the AI model's that rely on Nvidia AI chips; thus, reduce demand for the Nvidia chip as well.
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