What Makes This Bull Market Different | Adviser Investments

The ‘Magnificent Seven’ Make This Bull Market Different

Bull statue charging forward in New York City
We’re running with the bulls again. It may be hard to believe given recent worries about the debt ceiling, Federal Reserve policy, lingering inflation, the overarching possibility of recession and more.

But despite it all, if you include reinvested dividends, the S&P 500 was up more than 20% from its October 2022 low as of Friday, June 2.

It would be easy to assume that this rising tide has lifted all ships, but that’s not so. The “concentrated markets” trend that we highlighted in our quarterly webinar is still in play. Let’s review what’s going on under the surface and some key takeaways for long-term investors.

The Magnificent Seven

You may have heard about the Magnificent Seven in recent weeks. It’s not a reference to the classic Western film (though we’ll touch on that in a moment) but instead to the seven stocks that have been behind a large percentage of the stock markets’ gains this year.

The Magnificent Seven are not all in the tech sector, but those that aren’t are nonetheless tech-adjacent (their business is driven in large part by advances in hardware, software and data crunching). And recently, the rise of artificial intelligence has created a tailwind.

Collectively these stocks (Apple, Alphabet, Tesla, Amazon, Microsoft, Meta and Nvidia) have returned 50.3% since the market bottomed on Oct. 12, 2022, and they’ve returned 70.9% year to date through June 6. They are all included in the S&P 500 and account for a large portion of the index’s 21.1% and 12.4% returns over those respective periods.

By contrast, the S&P SmallCap 600, which includes none of the seven, has returned just 3.6% this year and 10.6% since the market’s October 2022 nadir.

This is a remarkable run of outperformance from a very narrow slice of the overall stock market. Our investment team does not have perfect hindsight, but our core portfolios have benefited from exposure to these stocks this year.

This chart illustrates the path from the 2022 S&P 500 to its return to bull market territory in June 2023.
Note: Chart shows hypothetical growth of $100,000 using total returns for the S&P 500 index, the Magnificent Seven (Apple, Alphabet, Tesla, Amazon, Microsoft, Meta and Nvidia) and the S&P SmallCap 600 index from 10/12/2022 through 6/6/2023. Sources: Morningstar Direct, Adviser.

How Does the Story End?

The analyst who coined the phrase “the Magnificent Seven” tapped into a deeper narrative of changing fortunes (intentionally or not). In the 1960 film of the same name, four of the seven gunslingers hired to defend the village against bandits didn’t make it out alive. The three survivors regarded themselves as no better off for their troubles. Life may not imitate art in this case, but there are parallels.

As wealth managers, we know the cyclical nature of the stock market well—what’s in favor today could be on the losing end of economic, technological or geopolitical trends tomorrow. And we don’t have to look too far back to find a time when these seven stocks collectively underperformed the broader market by a large margin. Between December 2021 and the end of 2022, they fell 46.4% compared to the S&P 500’s 18.5% decline over the same period.

The takeaway? Point in time and point of view both have a lot to do with stock market narratives.

Unlike the gunslingers, who took on great risk at high personal cost, our guiding investment principle is to manage risk to match our clients’ goals. We do this by diversifying across asset classes and market segments, keeping costs low, and taking a long-term approach to building wealth.

This material is distributed for informational purposes only. The ideas and opinions contained herein should not be viewed as recommendations or personal investment advice. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

All investments carry risk of loss and there is no guarantee that investment objectives will be achieved. Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

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