"The Magnificent Seven" and the S&P 500

"The Magnificent Seven" and the S&P 500

October 30, 2023

This year we have seen just how influential a handful of stocks can be to the market. Stock market indices that are weighted are susceptible to reflecting a return or performance that may not be indicative of how the whole market is performing. If you are unfamiliar with what the weighting of a stock market index is, the description is as follows.

Market Capitalization Weighting: Each stock's weight in the S&P 500 is determined by its market capitalization. Market capitalization is calculated by multiplying the stock's current market price by the number of outstanding shares. Stocks with higher market capitalizations have a larger influence on the index's performance.

Since the S&P 500 is market-capitalization-weighted, companies with the highest market capitalizations have a more significant impact on the index's overall performance. If these heavily weighted stocks perform exceptionally well, they can have a disproportionate positive effect on the index's return. Conversely, if they perform poorly, they can drag down the index's return.

Below is a chart provided by Hartford Funds that illustrates how this has affected the S&P 500 this year all the way up to the end of September.

As you can see, there is a wide dispersion between the big winners of the year and the rest of the index. We hope this gives more clarity on what exactly you are looking at when you see headlines about what the market is doing. If you have any questions about this concept or about your accounts, please do not hesitate to reach out.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.