A market dependent on a few large stocks is in a shaky position.
From WOLF STREET by Wolf Richter.
The Russell 2000 Index, which tracks the smallest 2,000 stocks in the Russell 3000 Index, fell 1.6% on Friday, putting it in the red for the year to date, back down to levels it first hit in January 2021, and down 18% from its all-time high in November 2021 (data via YCharts).
But the Nasdaq Composite Index It hit its fifth consecutive all-time high on Friday, up 9.1% from the previous cycle high in November 2021 and surging 73% from the big trough in December 2022. This was just one day of a very volatile stock market that sent the world into a multi-trillion-dollar stock frenzy (all data from Y Chart).
S&P 500 Index Bitcoin is currently ruled by a military junta of three companies with a combined market cap of roughly $10 trillion (Nvidia, Apple, Microsoft) and three companies with a combined market cap of $5.4 trillion (Amazon, Alphabet, Meta). Together, these six companies have a combined market cap of $15.2 trillion.
The S&P 500 has a combined market capitalization of about $45 trillion. Without these six stocks, the S&P 497 would have a market capitalization of $30 trillion. The entire market is made up of these six stocks. A fund that mirrors the S&P 500 has one-third of its holdings invested in just six stocks. Forget about diversification?
So while the S&P 500 fell slightly on Friday, down slightly from its all-time high, it is still up 13.3% from the previous cycle high on January 3, 2022, with a big trough in between.
S&P 500 Equal Weight Index It is not market cap weighted. It contains the same stocks as the S&P 500 Index, but all stocks in the index have the same weighting. The goal is to see if the performance of a few large market cap outliers is driving the overall S&P 500 Index, effectively hiding what is happening to the rest of the market. And that is indeed the case.
The index was down 0.7% on Friday, down 3.8% from its all-time high hit on March 28, returning to levels it first reached on Jan. 4, 2022.
year to date: So far in 2024, the Russell 2000 (red) is down 1%, the S&P 500 Equal Weight (maroon) is up 3.4%, the S&P 500 (purple) is up 13.9%, and the Nasdaq Composite (light blue) is up 17.8%.
This is a very strange split in the stock market.
The Mag 7 is now a misnomerTesla has dropped out of the group. Its market cap has fallen 56% from its all-time high to $557 billion, less than half the market cap of the next smallest, Meta, at $1.28 trillion. But for nostalgia’s sake, we’ll keep Tesla in the chart below (in green).
What happened to Tesla — a 56% drop from its peak and at one point a 75% drop — could happen to any of the Mag 7s.
Year-to-date in 2023 and 2024, Tesla is up 44%, which is still a big increase in normal times, but it’s the smallest increase among the Mag7.
Mag 7 in 2023 and 2024 so far:
- NVIDIA [NVDA]: +802%
- Meta [META]: +319%
- Amazon [AMZN]: +119%
- alphabet [GOOG]: +101%
- Microsoft [MSFT]: +84.6%
- apple [AAPL]: +64%
- Tesla [TSLA]: +44%.
Five of the Mag 7 are the largest stocks in the world by market capitalization. The whole world is now invested in these stocks. These stocks make the biggest difference, even when the rest of the market is doing poorly. It’s very volatile to have major indexes and portfolios tied to just a handful of stocks. But that’s the reality.
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