Rather watch Ara explain the market commentary in a video? Click here to watch.
For much of the past decade, the lion’s share of the gains in the S&P 500 have come from a handful of stocks, known as the Magnificent 7. At the start of 2025, they comprised ~33% of the index and were responsible for over 50% of its gains in 2024 and ~28% in 2023. This fact led many to conclude that the performance of the MAG7 largely dictates the performance of the S&P 500 index and that we would experience a world of pain if they significantly underperformed.
While there’s no denying their influence on markets, they are not the end-all-be-all. As of this writing and as shown in the chart below, all but two are down over 11%, with Tesla dropping 40%! To help put things in perspective, the market cap of the MAG7 is an eye-popping ~$15.5 trillion, compared with $48 trillion for the S&P 500.
This means that while these seven stocks have a large influence, there is room for the other 493 stocks to help shoulder some of the load, which is exactly what has transpired so far this year.
As seen in the chart below, both technology (-10%) and consumer discretionary sectors (-14.4%) are down significantly more than the S&P 500 (-3.7%). It’s no coincidence that the MAG7 makes up a large weighting of both sectors. What’s impressive is how eight sectors are actually in the green, compared with only three being in the red. This tells me that while U.S. markets are experiencing choppiness, they aren’t in panic mode. We are more so witnessing a rotation out of growth (i.e., technology) and into value (i.e., healthcare and utilities).
The upside here is if this trend continues, value stocks will automatically become a larger percentage of the index and help offset some of the underperformance from growth. This is partly why we generally prefer using index funds versus actively managed funds, as active funds often end up chasing returns and doubling down on stocks/sectors at the wrong time.
Proponents of active management will point out that index funds risk being too heavily skewed by a few stocks/sectors, which can end up hurting investors. While I understand the concern, a majority of actively managed funds underperform their respective benchmark, as consistently threading the needle of which sectors to over or underweight is extremely difficult.
While no one has the answers, you can prepare yourself by staying diversified and rebalancing when appropriate. As seen in the chart below, the truth is that growth more than doubled the returns of value from the start of 2020 to the end of 2024.
This level of outperformance was bound to shift at some point. Will this continue? No one knows, but I could make a case that this is beneficial because if growth had continued to outperform, we were bound to experience a nasty collapse at some point (e.g., dot-com bubble).
Healthy corrections should be welcomed and embraced. Staying diversified is your best recipe and will consistently help you get through these periods. While we’re currently dealing with plenty of uncertainty, making rash decisions or panicking is never the answer. A diversified portfolio of stocks, bonds, and cash has actually yielded a positive return this year.* Stay the course.
Feel free to discuss your situation with our financial planning firm.
* A diversified portfolio in this example is ~50% equities (U.S. and foreign), ~45% bonds, and 5% cash.
Divergent Planning, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Divergent Planning, LLC or performance returns of any Divergent Planning, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Divergent Planning, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Divergent Planning, LLC provides links for your convenience to websites produced by other providers or industry related material. Accessing websites through links directs you away from our website. Divergent Planning, LLC is not responsible for errors or omissions in the material on third party websites, and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from use of those websites.
Divergent Planning, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Divergent Planning, LLC and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Divergent Planning, LLC unless a client service agreement is in place.