Here are the takeaways from today’s Morning Brief, which you can register to receive every morning in your mailbox accompanied by:
We all know the “The Magnificent Seven” the current crop of mega-caps that have broken away from the pack of S&P 500 stocks. A group that has since then, there are only four left.
But the small-cap Russell 2000 index has its own pair of Magnificent members: “The Micros.”
Together, MicroStrategy (MSTR), the Bitcoin proxy game led by the Michael Saylor, quoted to infinityand Super Micro Computer (SMCI), a cloud storage company meeting AI’s demand for more computing power, is single-handedly responsible for maintaining the index year goes from bad to worse.
The Russell is down more than 3% this year, and without the performance of these two stocks, it would be down about 7% on Thursday, according to DataTrek. As Nicholas Colas, co-founder of DataTrek, said this week: “The Russell needs a few more stocks, not fewer, if it wants to start generating better returns.” »
Those numbers were even worse on Friday, as Super Micro fell as much as 19% after the company announced its earnings date but failed to do so. pre-announce earnings. A bit like being punished for arriving on time to a party but not sufficiently greeting and thanking the hosts.
Index concentration has been a recurring theme in market commentary since the emergence of the Magnificent Seven last year. The influence of the 10 main stocks of the S&P 500 has now reached new heights on the index and increased above historical norms since 2019.
For Russell, this concentration appears even more fragile if we consider the business behind the two “micro” stars.
MicroStrategy chained itself to the arc of SS Bitcoin, with its CEO call the world’s largest cryptocurrency the “ultimate property” of the investment world and asserting that the “end goal of the company is to acquire more bitcoins”.
The Super Micro prone to scandals, which I wrote about two months agois essentially an offshoot of Magnificent Seven’s AI focus, creating customizable servers for the nascent technology.
As Colas rightly said, there is some meme stock energy at work here with off-brand AI and crypto. But there’s another key reminder here for investors: This is actually how indexes are supposed to work.
The thinking goes that a top-heavy index is a tower built on sand, and investors should wait for the other shoe to drop. After all, how healthy can a stock market and economy be if the vast majority of companies are lagging the index?
At the start of the year, one of Wall Street’s favorite calls was the idea that gains would widen. As Josh Schafer wrote on Friday, this call has been a failure so far.
But as we saw for yearsThe point of an index is that sometimes a sector – or even a company – outperforms, and investors who buy the entire basket still benefit.
Additionally, in the history of the S&P 500, only one a handful of stocks have often accounted for most of the gains.
Like Ben Snider, Goldman Sachs equity strategist told us in February“New companies grow, become more weighted in the index and drag the market higher with them.”
Or, in the case of the Russell 2000, they move up to the big leagues.
Ethan Wolff-Mann is an editor at Yahoo Finance, where he publishes newsletters. Follow him on Twitter @ewolffmann.
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