Market leadership is getting even narrower as the 'Magnificent 4' takes over

Published Mon, Feb 5 20249:55 AM ESTUpdated Mon, Feb 5 202411:32 AM EST

The S & P 500 continues to hit new highs, but not in equal-weight terms. The brief period when non-big cap tech dominated is now over. We are back to begging for a broadening of the markets again. It gets worse: Not only is the market not broadening out, but even the "Magnificent Seven" are starting to act like the "Magnificent Four." Big-cap tech still dominates Friday's rally was almost entirely a big-cap tech affair: Meta rose 20% on strong earnings and announced it will begin to pay a quarterly dividend for the first time as well as a $50 billion share buyback program. Amazon was up 8% on strong earnings, Nvidia up 5%, Microsoft up 2% and Alphabet and Apple were up fractionally. Meta's strong earnings have been a major factor in pushing up overall S & P 500 earnings estimates. On Wednesday, S & P 500 fourth-quarter earnings were expected to be up 6.1%. After Meta's earnings, expectations were for earnings to be up 7.8%. Still no broadening But that was about it. At the New York Stock Exchange on Friday, there were two stocks declining for every one advancing. Major indexes at historic highs with negative breadth? Yikes. The S & P 500 is up 4% for the year, but the equal-weight S & P 500 is up only 0.2%. The equal-weight RSP ETF is still 4% below the historic closing high it hit at the end of 2021. Only about half the stocks in the S & P 500 are up this year. The two main small-cap indices, the Russell 2000 and the S & P SmallCap 600 , are both down 3% for the year. Over the weekend, Fidelity's director of global macro Jurrien Timmer, in a note to clients, noted just how lopsided the gains have been: "This tale of two markets can be illustrated … by indexing the Mag 7 to the level of the S & P 500 at its pre-pandemic peak (Feb 2020)," he said in a note to clients. "If the S & P 500 was the Mag 7, it would be trading above 10k now." Software and Semis are indeed eating the world The relentless rise of semis and software is well-reflected in the S & P 500. They are the two largest sub-sectors in the S & P 500: % Weight in S & P 500: Software/Services: 12.5% Semis: 8.9% Hardware: 8.2% Source: Strategas Still, even among the Magnificent 7, the ranks are thinning: Apple and Tesla are down this year. Magnificent 7 YTD Meta Platforms up 34% NVIDIA up 33% Amazon up 13% Microsoft up 9% Alphabet up 2% Apple down 3% Tesla down 24% In essence, we've gone from the Magnificent 7 to the Magnificent 4.