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Magnificent Seven Mega Mania

Expectations for an economic soft landing and the Fed nearing the end of interest rate hikes have driven stock market indexes to 52-week highs. Futures trading suggest a 99.8% probability the Fed will raise interest rates by 25 basis point next week in the next FOMC meeting. There are growing expectations that this could be the final rate hike in its tightening cycle.

The SPX Index volatility index (VIX – 13.76) has fallen to levels last witnessed during the first quarter of 2020, suggesting less fear in the stock market. Also, market internals such as the advance minus decline market breadth readings has broadened to other sectors and stocks outside the mega-cap technology realm, suggesting investors are returning.

Optimism is also growing among retail investors as the AAII bullish sentiments or expectations that stock prices will rise over the next six months reached a 1-year high of 46.4% during the week ending on 7/5/23. AAII bearish sentiments also fell to a low of 24.5% during the week ending on 7/5/23, or the lowest reading for the year.

Tesla’s second-quarter earnings released today after the market close met Street EPS estimates. However, TSLA is down over 12 points and -4% in after-hours trading. It is a quick reminder to traders that earnings season is underway and to expect an increase in market volatility after several months of relative calm.

TSLA and NFLX kicked off the second quarter earnings today. They will be followed next week by GOOGL (7/25/23 after market close), MSFT (7/25/23 AMC), META (7/26/23 AMC), AMZN (7/27/23 AMC), and AAPL (8/3/23 AMC).

The Magnificent Seven mega-cap stocks of AAPL, MSFT, AMZN, NVDA, TSLA, GOOGL, GOOG, and META continue to exert undue influence in the stock market. For instance, the seven names collectively account for 25% of SPX’s market capitalization.

Nasdaq has announced a special rebalancing of the popular Nasdaq 100 Index (NDX) due to breaching the concentration thresholds on 7/3/23. On 7/7/23, the Magnificent Seven comprised 55.5% of the NDX Index by market capitalization.

Nasdaq alluded that all Magnificent Seven will receive lower weightings, likely dropping the combined weighting to around 43.7% after the special rebalance. It is expected MSFT and NVDA will drop the most in their share weightings (around 3% each). APPL will regain its top spot within the NDX Index after the special rebalance drops by around 1%.

The special rebalancing will take effect on July 24th before the market opens. The redistribution can benefit other technology names such as AVGO and ADBE and mega-cap non-technology related names such as PEP and COST.

Will the special rebalancing help the stock market as there will be fewer concentrations in the seven mega-cap technology names, allowing for greater diversification of stocks?

Or will the rebalancing force institutional investors to lower their concentrated positions in the Magnificent Seven, leading to greater market volatility, at least in the near term?

In the meantime, the earnings beats have far exceeded the misses. One hundred (100) large-cap stocks have reported second-quarter earnings.

A brief review shows only twelve (12) have missed their EPS estimates. On the other hand, eighty-eight (88) have met or exceeded their estimates. It will be interesting to see if this trend can continue at the current torrid pace in the weeks ahead.

Source: Chart courtesy of

Source: Chart courtesy of

Source: Chart courtesy of

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