History shows stocks will still go up even if the ‘Magnificent 7’ lose steam

The S&P 500 (^GSPC) closed above 5,000 for the first time ever on Friday. And once again, the stocks leading it higher are the biggest members of the benchmark average.

Amazon (AMZN), Meta (META), Microsoft (MSFT), and Nvidia (NVDA) have produced a nearly 20% return to start the year, per analysis from Yahoo Finance’s Jared Blikre. The returns from these four stocks alone accounted for roughly 69% of the S&P 500’s gain this year as of Thursday.

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) are having a choppier start to the year. For some on Wall Street, this has become a concern as a shrinking number of stocks are leading the major average higher.

Fortunately for investors, even if top stocks are peaking, the market should probably still go up.

A recent analysis from BMO Capital Markets chief investment strategist Brian Belski showed that even when the top stocks driving an outsized part of the market action fall off, returns over the next year for the index historically have been quite good.

A chart from Belski shows that since 1992, on average, the S&P 500 has risen 14.3% in the year following a peak in contribution from the top 10 stocks in the benchmark average. The only time the S&P 500 delivered a negative return in the next year was in 2001 amid the fallout from the tech bubble.

“While some investors may be concerned that the market is likely to struggle without these stocks leading the way, our analysis shows that the S&P 500 has performed just fine following peaks in relative performance of the 10 largest stocks,” Belski wrote in a note to clients on Tuesday.

Goldman Sachs equity strategist Ben Snider pointed out that while the degree to which top stocks are dragging the major index higher is currently abnormally high, the idea that a few winners lead the S&P 500 gains isn’t a new concept. In fact, Snider argued, in the long run it’s been a typical feature, not a bug, of the benchmark index.

“That’s part of why the S&P 500 or the US equity market broadly has been so strong over the years. … New companies grow, and they become larger weights in the index, and they drag the market higher with them,” the analyst told Yahoo Finance. “And eventually, there will be disruptors and new technologies that emerge and new businesses that emerge. And those will become larger. And then, it will be their turn to drag the market higher.”

For the S&P to hit new records without significant contributions from the Magnificent Seven, there would need to be a broadening out in the market, where other lagging sectors begin to pick up steam. This has been seen recently in areas such as large-cap Healthcare (XLV), which is up 17% from its October lows, and the Financial Select Sector ETF (XLF), which is up 24% from October lows.

With 70% of S&P 500 companies topping analysts’ earnings per share forecasts in the fourth quarter, above the historical average of 63%, Bank of America US and Canada equity strategist Ohsung Kwon pointed to the increased breadth in earnings growth as a positive catalyst moving forward.

“You’re seeing [an] even higher percentage [of] companies posting positive earnings this quarter than last quarter,” Kwon told Yahoo Finance on Tuesday. “So actually, earnings breadth is improving as well, and that’s a positive cycle for equities.”

Snider thinks this broadening out is the most likely scenario this year once investors feel more confident in the Federal Reserve’s interest rate-cutting path.

“As investors stop worrying so much about exactly when the Fed will start to cut rates, I think we’ll see a lot of these companies outside of the Magnificent Seven have pretty strong earnings growth, and that will cause them to do pretty well in turn,” Snider said.

A sign is posted at Nvidia headquarters on February 05, 2024, in Santa Clara, California. (Justin Sullivan/Getty Images) (Justin Sullivan via Getty Images)

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

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