Chart of the week
The Magnificent 7
What does this chart show?
Since 1900, the excess returns of the top-7 stocks in the S&P 500 has been largely the same as the excess returns of all 500 index constituents.
Why does it matter?
The top-7 stocks in the S&P 500 currently make up ~30% of the S&P 500, so they have been the subject of constant study and scrutiny while earning the moniker, the Magnificent 7.
This level of market concentration isn’t abnormal or necessarily a reason to be concerned. Similar levels last occurred in the 1950-60s, which was a strong period of excess returns for all constituents and the top-7.
The Magnificent 7 are, for now, the largest (and some of the best) companies by profit and free-cash flow1. The beauty of the market capitalization weighting of the index is that when they cease to be, their index weighting will decline. This dynamic has not clearly harmed the returns of all 500 constituents in the past.
The Bottom Line
History doesn’t show that there’s a clear reason to worry about market concentration. As shown in the chart, if one only held the top-7 index constituents, they’d be in the ~same place as holding all 500.
Chart & Data Sources: Bridgewater Associates
