As investors prepare for the busiest week of the U.S. earnings season, debate is picking up about the influence of tech giants on U.S. equity indexes and whether there could be true market broadening. The S&P 500 composite, the benchmark’market cap’ index increasingly dominated by the ‘Mag 7’, has gained 67% since the beginning of 2023, more than double the ‘equal-weight’ index’s 32%. Larry Adam, chief investment officer at Raymond James, believes that 12-month forward earnings estimates for the S&P 500 have outpaced estimates for the equal-weight index by 14%. Tajinder Dhillon, senior research analyst at LSEG, notes that the ‘Mag 7’ last year accounted for 52% of overall earnings growth.
Many investors and analysts consider it unhealthy to have the fate of the entire market dependent on so few companies. If the market basically goes where the ‘Mag 7’ or Nvidia go, why should an investor bother buying anything else? That’s a recipe for market inefficiencies.
There have recently been nascent signs that the market may be broadening out beyond tech and AI-related names, largely thanks to positive news on the trade front. Last week, the equal-weight index eclipsed November’s high to set a fresh record. Around 160 of the S&P 500-listed firms report this week, including Meta and Microsoft on Wednesday and Amazon and Apple on Wednesday.
The equal-weight index’s rise to new highs last week suggests the rising tide is lifting all boats, not just the billionaires’ yachts. Other sectors like financials and industrials are also doing well, and many indices outside the U.S. that aren’t tech-heavy are approaching or printing new highs also.
