The magnificent 7 index, now in correction, affects the S&P500
Over the past few months, the Magnificent 7 (Apple, Microsoft, Meta, Amazon, Alphabet, NVIDIA and Tesla) have shown a less-than-exciting performance, entering a correction phase in recent weeks. Let us take a look at the performance of the index that groups them and its relationship to the S&P500.
The magnificent seven continue to outperform the major US stock markets, but the momentum is decidedly negative. This is the extreme summary of the chart above representing the performance of the seven sisters of technology compared to the S&P500 and the Russell 3000. The equalised index of the magnificent seven has returned to the lows of early autumn 2024 and is in the midst of a correction from the peak reached at the beginning of the year.
Trend over the last three months is even more significant. You can see the downward acceleration of the magnificent 7 that started in February.
But how much does the magnificent 7 influence the performance of the S&P500? To test this, we analysed correlation and linear regression.
Correlation:
The correlation coefficient of 0.8668 indicates that the average daily returns of the Magnificent Seven and those of the S&P500 move in a very similar way: when the Magnificent Seven stocks experience an increase (or decrease), the S&P500 tends to behave similarly.
Linear regression:
- R-squared = 0.751: About 75% of the variation in S&P500 returns is explained by the average movements of the Magnificent Seven, suggesting a strong link.
- Coefficient of the variable Mag7 (beta = 0.4597): A 1% increase in the average return of the Magnificent Seven is associated, on average, with a roughly 0.46% increase in the S&P500. This indicates that, while highly correlated, the effect of the Magnificent Seven on the S&P500 has a sensitivity of less than 1.
- Constant term close to zero: The fact that the constant coefficient is practically zero (about -4.58e-05) implies that, in the absence of changes in the returns of the Magnificent Seven, the SP500 would not change significantly.
The analysis – limited to the last year – seems to confirm the heavy conditioning that the performance of the Magnificent Seven operates on the S&P500, and this would indicate the need to bet on less conditioned indices to improve the degree of diversification in US equities.
