Markets at the mercy of the not-so-magnificent seven

Blame the magnificent seven for recent market bloodletting. There has been growing concern in 2024 that indices have become overly reliant on the seven mega-cap companies – Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta and Tesla. Their outsized influence was made clear on Wednesday as investors digested earnings from Tesla and Google parent Alphabet, with the S&P 500 suffering its worst day since 2022, sliding 2.3 per cent.

The damage was caused by the mega-caps, as evidenced by the Roundhill Magnificent Seven ETF sinking a record 6.1 per cent, compared with a fall of just 1.2 per cent for the S&P 500 minus the seven stocks.

“Concentration risk is clearly a big thing”, says Société Générale’s Andrew Lapthorne. He notes Capital Group research on the so-called ENC index, which refers to the “effective number of constituents” in the S&P 500. When Capital Group’s research was published last year, the S&P 500 wasn’t producing any more diversification than a portfolio of 60 equal-weighted stocks. Since then, the magnificent seven have grown even more dominant.

Consequently, says Lapthorne, today’s number stands at just 49, which is “kinda scary for an index worth over $47 trillion (€43.3 trillion) of market cap”.

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