How the “Magnificent Seven” misleads

All models are wrong, goes the statisticians’ adage, but some are useful. This time last year, plenty of pundits’ models started looking more wrong and less useful. The consensus forecast was a grim spell for economic growth and a dreary one for stock prices—and that was before a clutch of American regional banks buckled. Higher interest rates seemed set to cause pain everywhere. Instead, in the very country where the banking turmoil unfolded, the stockmarket began to soar. By the summer America’s S&P 500 index of leading shares had risen by 28% from a trough hit the previous autumn. Analysts hunted for a new model to explain what was going on, and the popular choice revolved around the “Magnificent Seven”.

The reason was that shares in this group of tech giants—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla—were acting as if they made up a market of their own. By the start of June the S&P 500 had risen by 12% since the beginning of the year, but virtually the entire gain was down to these seven stocks, with the other 493 having collectively moved sideways. By July they were the biggest seven companies in the index. By late October the Magnificent Seven had added $3.4trn (or 50%) to their combined market value since the start of the year, even as the other 493 had lost $1trn (3.8%). Apple was the group’s worst performer but had nevertheless seen its share price rise by 30%.