Pundits seem to find it shocking that a small number of stocks like the Magnificent Seven should make up such a large portion of a major index like the S&P 500. I’m of two minds about this:

–on the one hand, most other major stock markets show this heavy-half structure most of the time. There are typically a subset of multi-nationals or of state-controlled enterprises, each of whom has a, say, 5%+ weight in the index and which in the aggregate dominate the index;

–on the other–and something no one seems to be mentioning in public comment– is that in the history of the US market, the kind of large-stock concentration we are now seeing has most often come at the tail end of an intensely speculative period. The conglomerate era of the late 1960s; the Nifty Fifty, “one-decision” stocks of the early 1970s: the peak of the oil boom in 1980 and, of course, the peak of the zero-interest-rate pandemic frenzy in 2021 are all prominent examples.

My guess is that we’re too close in time to the 2021-22 stock market collapse that happened as we came out of the the pandemic for another overall stock market collapse to occur. We will likely also have an equity-supportive fixed income market that will work against significant overall market PE decline. My guess is that the US stock indices will be down slightly next year, with gains in the rest of the market offsetting a, say, 10% decline among the members of the Magnificent Seven. 

I’ve owned shares of MSFT and NVDA for years, and have no present intention to sell. I’d probably trim on a significant rise in either, simply on position size grounds, but all other things being equal am content to hold. If I had to guess, I’d say both will go sideways for a while, though, and will only be driven higher by surprisingly strong reported earnings. If so, I’d guess the other five could be down by 10%-15% or so, which would translate into a 3%-5%-ish decline in the S&P 500. I’m figuring that most/all of that loss would be offset in the S&P 500 by potential strength of not-so-glamorous stocks in the rest of the market that show modest earnings growth. 

The contrary thesis would be that selling in the Magnificent Seven becomes so severe that investors start to perceive them as relative bargains and sell holdings in the rest of the market to switch into them. This is the way a bear market typically sustains itself, and we’ve got to be alert to the possibility. But, as I’ve written above, my main scenario is that a bunch of ok stocks offset the damage from the Magnificent Seven, not that very sharp declines in the Seven undermine the rest of the market.