On Monday (11 December, 2023), the market heavyweights known as the “Magnificent Seven” mega-cap tech firms suddenly fell while the major indexes rallied to new highs, capturing everyone’s attention.
Amidst indications of a wider sector rotation, this unusual divergence has cast new doubt on Big Tech’s leadership.
Rare Divergence Raises Eyebrows
Meta, Apple, Nvidia, Microsoft, Amazon, Alphabet, and Tesla were all severely underperforming as the Nasdaq composite and S&P 500 both reached new 52-week highs in an incredibly unusual session.
The tech-heavy Nasdaq climbed slightly as the other major indices fell in market capitalization. Dow Jones Market Data reports that this is just the second occurrence of its kind since Facebook changed its name to Meta Platforms in 2012. The first was in the aftermath of Donald Trump’s 2016 presidential election in November.
On the same day, the Philadelphia Semiconductor Index gained 3.4% and closed at a new record high. The market leader in semiconductors, Nvidia, whose stock has increased by more than 200% so far this year, did not participate in this rise.
What Does This Mean?
The actions on Monday have piqued the interest of Wall Street, although a single day does not constitute a trend. Market strategists remarked on the robust breadth across indices, as advancers outpaced decliners by a significant margin.
However, they did warn against making hasty assumptions regarding a change in leadership at this time.
The fact that NDX is up is “quite remarkable,” said Interactive Brokers’ chief market strategist Steve Sosnick in an interview with MarketWatch. Imagine a market where seven stocks dominate nearly every aspect; it’s crazy.
Although he did not rule out the possibility of cyclic movements that might extend market leadership until 2024, he did caution that signs are still mixed.
Semiconductors Stay Hot
There is no indication that the Philadelphia Semiconductor Index will slow down, despite the fact that it has already increased by more than 50% in 2022.
Chips are still in high demand despite the uncertain economic climate, therefore the sector has been drawing inflows throughout the year.
Traders are scouring the space for more promising names than Nvidia, as shown by Monday’s gain. The index’s gains were driven, in part, by Broadcom, which climbed 9% to a record high.
Are Bigger Trends At Play?
Investors are questioning the long-term viability of a leadership model focused solely on mega-cap technology companies as key indices hover near year-end highs.
Nearly 40% of the market value of the Nasdaq-100 is comprised of the Magnificent Seven: Tesla, Meta, Apple, Nvidia, Microsoft, Amazon, and Alphabet. They have also been a major driver of return for the S&P 500 over the last decade.
The long-term stability of an investment portfolio based on a small number of equities is a point of contention for many strategists. That is why it is extremely consequential to see any indication of equity leadership expanding.
While demand for technology is strong, Monday’s rise suggested that attention may be shifting away from the biggest names in the industry.
Instead of responding just to Nvidia and Advanced Micro Devices, traders started bidding up equities in Broadcom and other semiconductor companies.
What To Watch Going Forward
Was the Magnificent Seven’s off day just a blip, or early evidence of a rotation underway? That’s the key question analysts will be evaluating in upcoming sessions.
Here are some dynamics to monitor that could provide further clues:
- Sustainability of gains in semiconductors and adjacent hardware spaces
- Continued breadth in tech beyond mega-caps
- Leadership among recovery-oriented cyclicals and small caps
- Defensive sectors out or underperforming
- Movements in benchmark Treasury yields
If Monday’s odd divergence is just that, an aberration, then the Mag Seven will likely resume their dominant role. It may encourage wagers on other parts of the market now that traders have seen what happens when they aren’t there.