The stock market’s resilience in recent years, particularly the S&P 500’s historic run, has perplexed many, with some experts now suggesting that the index’s performance is driven by a handful of mega-cap companies rather than the broader economy.
What Happened: More than half of the S&P 500’s total growth in 2023 and 2024 was attributed to the so-called Magnificent Seven: Nvidia Corp., Apple Inc., Amazon.com Inc., Alphabet Inc., Meta Platforms Inc., Microsoft Corp., and Tesla Inc..
The “fundamentals” theory, which links stock prices to a company’s earnings, and the “liquidity” theory, which ties market movements to Federal Reserve actions, have both been challenged by recent events.
For instance, the market soared in 2023 and 2024 even as the Fed raised interest rates and drained trillions in liquidity. Meanwhile, the stock prices continued rising despite higher valuations, defying the fundamental theory. This has given rise to new explanations.
One prominent theory is the AI bubble, which suggests that the Magnificent 7’s outsized gains are based on investor belief in the transformative potential of artificial intelligence.
Torsten Sløk, chief economist at Apollo, notes that the valuations of these companies, such as Nvidia’s price-to-earnings ratio of 57 to 1, are more stretched than those of the top dot-com firms in the 1990s.
Another theory, the passive funds theory, points to a fundamental shift in market structure. According to Mike Green, chief strategist at Simplify Asset Management, about half of all fund assets are now held in passive funds, which automatically buy stocks in an index, regardless of economic conditions or company performance.
This constant inflow of money, he argues, naturally inflates the valuations of the largest companies, creating a “mean expansion” where high valuations lead to even higher ones.
Why It Matters: According to a 2024 study by Goldman Sachs, the Magnificent 7 stocks have driven the S&P 500 growth since 2014, with their index rising from 500 to over 3500.
This concentration aligns with the Pareto principle, where 20% of assets drive 80% of returns, supported by a 2018 ScienceDirect study on stock market indices that found power-law distributions in extreme variations, suggesting the Magnificent 7's dominance is a natural outcome of market-cap weighting rather than an anomaly.
Additionally, a recent analysis from Beth Kindig‘s I/O Fund suggests that while the S&P 500 is likely overdue for a correction, this expected downturn will present an "exceptional buying opportunity" for investors.
According to the analysis, of the eight key markets monitored for confirmation, seven—including Small Caps, Semiconductors, and the Advance-Decline Line—are currently diverging from the index.
Despite these warning signs, the I/O Fund remains optimistic about the long-term trend, "If the upcoming correction holds above critical support, we believe it will set the stage for another exceptional buying opportunity," the note stated.
Price Action: Here’s how the Magnificent 7 stocks have performed lately and in the long term.
| Stocks/Indices/ETFs | YTD Performance | One-Year Performance | Five-Year Performance |
| Nvidia Corporation (NASDAQ:NVDA) | 32.12% | 67.62% | 1480.75% |
| Apple Inc. (NASDAQ:AAPL) | -5.95% | 5.43% | 99.59% |
| Microsoft Corp. (NASDAQ:MSFT) | 24.72% | 28.33% | 149.90% |
| Amazon.com Inc. (NASDAQ:AMZN) | 1.12% | 33.51% | 41.48% |
| Alphabet Inc. (NASDAQ:GOOG) | 6.05% | 23.30% | 168.15% |
| Meta Platforms Inc. (NASDAQ:META) | 28.38% | 49.10% | 194.48% |
| Tesla Inc. (NASDAQ:TSLA) | -13.08% | 66.93% | 199.57% |
| S&P 500 | 8.88% | 19.55% | 89.44% |
| Nasdaq 100 | 12.57% | 27.34% | 111.49% |
| Roundhill Magnificent Seven ETF (BATS:MAGS) | 10.65% | 40.81% | 139.05% |
Price Action: The SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 index and Nasdaq 100 index, respectively, ended higher on Friday. The SPY was up 0.78% at $637.18, while the QQQ advanced 0.93% to $574.55, according to Benzinga Pro data.
On Monday, the futures of S&P 500, Dow Jones and Nasdaq 100 indices were trading higher.
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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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