In 2024, 50% of the total returns of the S&P 500 was from 7 stocks, aka the Magnificent Seven.
That’s about a 12.5% total return shared among 7 stocks out of 500+.
Who are the Magnificent Seven? and why are they so important?
The Magnificent Seven are gigacap stocks with a minimum market value of $1T.
Their names are probably very familiar to you:
1 – Alphabet, 2 – Amazon.com, 3 – Apple, 4 – Meta Platforms, 5 – Microsoft, 6 – Nvidia, 7 – Tesla
Combined together they have a market value of more than $10 trillion.
Crazy, isn’t it?
And this is why they are so important. They have this gigantic impact on the performance of the market, impacting the portfolio value of millions of big and small investors.
In 2024, $NVDA alone was up +171%, that is over 20% of the entire gain of the S&P 500 in 2024 according to the WSJ.
While $META and $TSLA were up +65% and +62% respectively, the remaining 50% of the S&P total return was to be shared among 493+ stocks.
Why bother investing in the other 493+ stocks then?
That’s the real question because the Magnificent 7 are shaking up the S&P 500 like never before.
A market index like the S&P 500 should reflect the performance of the top 500 stocks in the market, not reflect the performance of a small group of stocks.
Because such a concentration of wealth increases the overall risk of the S&P 500, killing the benefits of market diversification.
As a small investor, this will impact the risks of your asset allocation. Something you really do not want for the long term performance of your assets if it’s 60/40 in stocks and fixed income.
If you took instead the S&P 500 Equal Weighted as your benchmark, the total return in 2024 was only half the actual performance of the S&P 500, because no group of stocks like the Magnificent Seven could impact the true performance of the overall index. And that meant lower risk too with lower annual volatility.
If you follow a 60/40 asset allocation approach or any kind of combination between the S&P 500 and another asset class, the S&P 500 Equal Weighted will definitely have a positive impact on your asset allocation.
And if you are looking for a different kind of market diversification with a significant performance advantage over the S&P 500, the US MidCap 500 Value Advantage Index is structured as equal weighted and will rebalance every 6 months with new constituents so that no group of stocks can dominate and increase the risks of the overall index.
What do you think? does this resonate with you?
If it does, simply click here to start investing in a market index that is different from the S&P 500.