The Shifting Tides of the S&P 500: Navigating the Evolving Landscape

The second half of 2024 has witnessed a significant shift in the dynamics of the stock market, with the broadening of the rally emerging as a crucial theme. As the US economy continues to defy initial concerns, the recent push to new record highs has been driven by a diverse range of companies, rather than the traditional tech giants. This development has sparked a lively debate among investors about the future direction of the market and the potential leadership of the "Magnificent Seven" versus the broader S&P 500 index.

Uncovering the Shifting Tides of the S&P 500

The Magnificent Seven's Dominance Challenged

The past year and a half have witnessed the dominance of the "Magnificent Seven" – Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and Nvidia (NVDA) – in driving the market's performance. However, the recent data from FactSet suggests a shift in the landscape. The 493 companies in the S&P 500 outside the Magnificent Seven are expected to see their earnings grow by an average of more than 13% over the next five quarters, while the Magnificent Seven are projected to experience an average earnings growth of nearly 19% during the same period.This data points to a narrowing gap between the performance of the Magnificent Seven and the broader S&P 500 index. While the Magnificent Seven are still expected to post superior and more reliable earnings growth, the trend suggests that the rest of the index may be catching up, potentially leading to a continued broadening of the market rally.

The Debate Continues: Big Tech or the Broader S&P 500?

The ongoing debate among investors centers around whether the market's next leg higher will be led by the Magnificent Seven or the broader S&P 500. DataTrek co-founder Nicholas Colas believes that the Magnificent Seven "should begin to play catchup into the end of the year," as the tech-heavy Nasdaq 100 (^NDX) has underperformed the S&P 500 over the past month and throughout 2024.However, Colas also notes that the path to outperformance will depend on the assessment of whether Big Tech or the rest of the S&P 500 will exhibit better earnings momentum. If one believes that US GDP growth can reach 3% in 2025, then the S&P 493 (the 493 companies outside the Magnificent Seven) may be the better bet. Colas' own view is that growth will be more modest, giving the edge to Big Tech.

The Tech Revival: Hints of a Comeback?

The recent performance of some tech giants suggests that the revival of the sector may already be underway. Nvidia has soared to a fresh record high over the past month, while Apple stock closed at a record high of $235 per share on Friday and added to those gains on Monday. Netflix (NFLX), the first of the large tech giants to report earnings, saw a massive rally in its stock to a fresh record high after another impressive round of earnings.These moves in the tech sector may serve as an early reminder that while growth in tech is "expected" to slow from its rapid pace over the past year, that doesn't mean there can't be upside surprises – or that it still can't outperform the broader market. The empirical evidence of the past 18 months, where many tech earnings reports have come in better than expected, suggests that the Magnificent Seven may still have the potential to lead the market's charge.As the debate continues, investors will be closely watching the performance of the Magnificent Seven and the broader S&P 500 in the coming quarters, seeking to identify the driving forces behind the market's next phase of growth.