Monday Takeaways: The Magnificent Seven’s Creative Destruction

Shah Gilani|July 8, 2024

Despite the shortened trading week… July has kicked off with plenty of fireworks.

The S&P hit several new highs last week… and the trend shows no signs of stopping.

Yet a new Barron’s article that suggests otherwise… that the Magnificent Seven are facing “creative destruction.”

Their advice for what to do about it is just plain wrong… and I explain why in today’s video.

Plus, there was one number that has investors convinced rate cuts are coming soon. But it’s not that simple.

See what else is brewing in the markets… in your Monday Takeaways.

Click on the thumbnail below to watch.

Transcript

Hey, everybody. Shah Gilani here with your Monday Takeaways.

First up, last week was an abbreviated trading week because Thursday was Independence Day, July Fourth, and the markets were closed.

When you have an abbreviated trading week, anything can happen, especially when it’s a long weekend because a lot of folks likely would take Friday off.

So you probably had Thursday, Friday off. They’re making it a four-day weekend.

And on top of that, people were leaving on Monday to go and do whatever they were going to do, enjoy the whole week.

But the markets enjoyed Independence Day too. The day off was probably an energizing moment because all in all, for the week, it was anything but quiet.

The markets continued to rally and closed the week with new highs yet again.

The S&P on the week was up 2%. The Nasdaq Composite was up 3.5%.

The takeaway from there is the bull market continues. Until we something see something interrupt this bull market, continue to go with it.

Speaking of interruption, today in Barron’s, there’s a piece about a Bridgewater Associates research report that looks at U.S. market history and innovation and change and creative destruction to address the Magnificent Seven and the likelihood that they would continue their outperformance.

So a couple of takeaways from the Barron’s piece. First of all, and this is really incredible, year to date, the market, the S&P 500 – if it’s still the market, if it’s not, if the market really isn’t the Magnificent Seven – added $4.18 trillion to its market cap from the Magnificent Seven. The total market cap increase for the S&P 500 year to date 2024 was $6.21 trillion.

Of that, about two-thirds, $4.18 trillion, came from seven stocks.You know what they are.

So the article goes on to cite the Bridgewater Associates research piece saying that over time, because of creative destruction, those names aren’t necessarily going to be the names going forward. They cite the railroads, late 1800s to the 1920s, and how they were disrupted by the automobiles from 1920s to 1960s. Autos were, like, the hot area.

Chemicals, 1930s to 1960s, hot. Telecoms up until 1984 when they broke up AT&T. So all of these things had their moments. And as far as the U.S. autos, what really interrupted that, you know, were Japanese imports.

So there are things that cause destruction of trends and of companies, of their profitability, not necessarily of their stock, but they don’t lead anymore. So this article goes on to cite again the Bridgewater piece that if they look back over the last century, taking into account creative disruption and things that change, you would have been a lot better off, not in a capitalization weighted index market like the S&P 500, but in an equal weighted index.

Considerably better.

So they say, if you look at the Invesco Equal Weight S&P 500 ETF, that’s maybe where you want to go because there’s going to be creative destruction ahead. They say iShares MSCI USA Equal Weight ETF with 600 stocks in is even better than the equal weight S&P 500. And then, of course, there’s the Invesco, FTSE, RAFL U.S. 1,000, which weights stocks based on their sales, profits, book value, dividends, buybacks, etc., and that looks to be the best performer.

What’s your takeaway from that?

It’s not what Bridgewater implies, that it’s time to take your profits on the Magnificent Seven and go into an equal weight because over the last century, equal weight has outperformed cap weight because of greater stocks. And because if you were in some of those names who were hot hot hot hot, then they fell out and stayed with them.

But I look at it differently. First of all, the index has changes, and some of those ones that fall out of favor are replaced by ones that do better. That is just math.

The takeaway really is you stick with what works.

Forget research. Forget all of that stuff because you’re going to look the wrong way. When something’s working, when there is a trend intact, you stay with it. If the Magnificent Seven or Five or Fab Four of them are working for you, you stay with those until they don’t.

And how do you stay with them until they don’t? You make sure you have stops in. They come back down and you give up maybe 10%, 15% of the gains you’ve had.

Nvidia, for example, year to date is up 154%. So if you have a stop in there 15% lower and it comes down 15%, you’re still well ahead on Nvidia.

That’s how you protect yourself. That’s how you stay in the names. You don’t put your stops in so tightly that you get taken out and the thing goes up another 150% in the second half of the year, which I’m not saying it’s going to, but you don’t get shaken out, because you want to own these names for the long term until trends change, until some creative disruption changes something about Meta, changes something about Nvidia, changes something about Microsoft, but good luck with that.

Stay with it. The takeaway is the trend is your friend. If the Mag Seven are working, you stay with it. Stay within your ETF.

Stay within your portfolio as far as those picks. You stay with it. Bridgewater Associates, God bless you. You guys are smart, but don’t always get it right.

Next thing I want to talk about is we’ve got nonfarm payrolls on Friday, and they were a boost to the market. Why? Because nonfarm farm payrolls were better than expected.

Some 206,000 jobs were added versus the expectation for about 190,000. The 206,000 versus 190,000. The market saw that as well.

The labor market’s still strong. Wages are good. On year to date, they’re up about 5.1% on hourly wages. So consumers still making money, still able to spend. The economy is still doing well. Employers are still adding. So that’s good.

But the unemployment number went from 4% to 4.1%. That’s why everyone got kind of hung up by. Oh, unemployment just ticked higher. Therefore, the Fed’s likely to cut.

What’s the takeaway from there?

It’s the narrative reaction. The action is, they’re the numbers. The reaction to the narrative, which is if things are slowing down and if the labor market, which in on one hand, 4.1% unemployment. It’s nothing. Up from 4%. Oh, that’s oh, it’s nothing.

But the market hung its hat on that that the Fed was likely to cut sometime. Now it looks like September, according to Fed funds.

Takeaway from that is if the Fed’s going to cut, if the narrative is the Fed’s going to cut, that’s supportive of the market, of the Mag Seven, of the market in general. Again, that’s why we saw new highs at the end of last week.

Now the last thing I want to say this morning is we’ve got an interesting week ahead of us.

We have Jerome Powell speaking to the Senate on Tuesday and the House on Wednesday. So you got the semiannual address to Congress of what’s going on. He’s going to get asked a lot of questions, including political questions.

That’s going to be interesting to watch. I don’t know if that’s going to move markets. I think he’s going to stick to the script, and that’s probably going to be an event, maybe a non-event, but you never know. You can always surprise.

We have on Thursday, we got CPI, people. That’s going to be well watched and that could shake things up. It could boost the market or it could cause a stalling out in this tremendous rally.

It would have to be a pretty ugly number as far as CPI to stall this rally.

So markets are looking for analysts are looking for 3.1% annual 0.1% month over month, a 3.1% annual growth, yeah, growth increase in CPI, in inflation. So if we come in considerably lower, it’s going to be a rally in the alley. It’ll be coming considerably higher, and the numbers have been pretty close to where the targets are, where the estimates are.

But if the numbers surprises to the upside, their rally could see a good pause and maybe an opportunity if we get some kind of correction to buy some of the great names if they go on sale. Good luck with that.

I’m waiting for a bunch of names to go on sale, but they haven’t yet.

And the last thing on Friday… earnings.

Second quarter earnings start with the banks. Wells Fargo, Citi, JPMorgan.

Friday is going to be an interesting day. Again, I expect them to do really well. I expect them to be. And if they do, then market’s going higher.

If they surprise and don’t meet estimates, if they underperform in terms of revenue, if they have been set aside, for nonperforming assets, which would be a surprise, then maybe we’ll see a stall in the market. Financials have been good. So I’m expecting them to continue to be good. Earnings start on Friday with the banks.

Your takeaway from that is watch. It’s going to be an interesting week.

That’s it. I’ll catch you guys next week.

Cheers.