Magnificent Seven Stocks Shake Up Market Indices Amid AI Boom
July 12, 2023
The group of stocks, once known as the FAANGs, then evolved to MAMAA, and now called the Magnificent Seven, have been given various monikers by Mad Money’s Jim Cramer. Regardless of the name, these stocks’ significant influence has started to pose challenges for market indices. Following a resurgence of the tech trade and a significant rally in 2023 driven by the artificial intelligence boom, key financial benchmarks are breaking away from diversification norms. This shift is having a considerable impact on numerous investment products and the hundreds of billions of dollars tied to them.
A Closer Look at the Market Performance
The Nasdaq 100 (NDX), the preferred index for leading growth-oriented stocks, has seen an almost 40% increase YTD, a stark contrast to the S&P 500’s 15% gain. The bull market that restarted in March is being driven by the Magnificent Seven and their exceptional performance in 2023: Alphabet (GOOGL) up 31%, Microsoft (MSFT) up 39%, Amazon (AMZN) up 48%, Apple (AAPL) up 51%, Meta (META) up 136%, Tesla (TSLA) up 149%, and Nvidia (NVDA) up 195%. To put this in context, without the significant gains from these powerhouse stocks, the S&P 500 would be slightly down for the year. There is even an “overconcentration” in the Nasdaq 100 (NDX), an index known for these types of heavyweight stocks, compelling the index provider to take action.
Understanding Rebalancing and its Implications
Rebalancing differs from reconstitution in that it alters the weights of an index and the percentages of their stock components, rather than adding or removing stocks. The Nasdaq has only performed a special rebalance twice before, in December 1998 and May 2011. The rules stipulate that action will be taken if the aggregate total of all stocks with individual weights above 4.5% in the index surpasses 48% (currently, the “Magnificent Seven” stocks make up 55% of the total weighting of the Nasdaq 100). This rule comes into play as Apple surpasses a $3T market cap, earning the tech giant high praise from analysts.
Key Market Events and Trends to Watch
Changes in the rebalancing will be announced on July 14 and will come into effect before the market opens on July 24. Keep a close watch on ETFs such as the Invesco QQQ Trust (NASDAQ:QQQ), Invesco NASDAQ 100 (NASDAQ:QQQM), and the ProShares UltraPro QQQ ETF (NASDAQ:TQQQ), as well as any positioning that may occur beforehand. Analysts like Jim Sloan are also investigating whether the leadership of the Magnificent Seven makes sense by comparing value vs. growth dynamics. Meanwhile, UFD Capital is encouraging investors to maintain a long-term perspective, despite fears of an artificial intelligence bubble.