7 Standards and 496 Poors

By TradeSmith Research Team

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The S&P 500 looks a lot like the S&P 7 these days.

Just a handful of stocks — seven of which are now called “Magnificent” by the mainstream media — are responsible for the majority of the gains this year. The whole market dances to their tune.

But watch out: When they tumble, they can drag your retirement portfolio down with a ferocity like nothing else.

Just look what happens when you compare the benchmark S&P 500 to the equal-weighted S&P.

Not only is the entire equal-weighted stock market down over 8% this year — it never confirmed a new bull market. Both times the index has rallied about 22% off the lows, it got smacked down again.

Should just seven “magnificent” companies, which collectively make up over 28% of the S&P 500, be enough to guide us to a new bull market?

Should the generals be the only ones marching into war?

To be fair, some of these stocks are magnificent for good reason. They represent outstanding businesses with big cash moats and are leaders in their fields.

But that doesn’t mean all of them are. And should any of them crack, it could spell disaster for your portfolio.

Earnings season is giving us clues about which stocks are the weakest links in the chain. So today, I’ll round up the Magnificent Seven’s earnings reports so far and probe them for weak spots.

But first, we must understand just how big an impact these seven stocks have for every retirement portfolio out there.

7 Standards and 496 Poors

The Magnificent Seven are, in order of S&P 500 weighting:

  1. Microsoft (MSFT)
  2. Apple (AAPL)
  3. Amazon (AMZN)
  4. Nvidia (NVDA)
  5. Alphabet (GOOG and GOOGL)
  6. Meta Platforms (META)
  7. Tesla (TSLA)
These stocks collectively make up 28% of the S&P. And a majority of the S&P 500 stocks, 308 of them to be precise, each make up just 0.10% of the index or less.

That’s an issue. But at least in the short term, it’s probably for the best. 268 of the S&P 500 stocks are down year-to-date. That’s what’s dragging down the returns of the equal-weighted index.

So, this is the situation your, my, and everyone else’s retirement portfolio is in. We’re overwhelmingly concentrated toward seven major tech firms.

That means it’s critical to understand where these companies sit in terms of overall health and their most recent performance during quarterly earnings season. Let’s take a close look at each one’s recent report, with the help of TradeSmith’s proprietary Business Quality Score (BQS)…

(Disclosure: I directly own shares of MSFT and AAPL)

  1. Microsoft (MSFT) | 7.23% Weighting

    Microsoft earns its “Magnificent” title. It stands strong with a Business Quality Score of 89.

    And in its recent earnings report, the company beat on earnings per share (EPS) by 13% and on revenue by 3.6%. Its revenue grew 12.76% year-over-year.

    Microsoft is at the forefront of A.I. technology right now, with its high-profile investment in OpenAI this year. This is encouraging, but also presents some risk if the bullish A.I. narrative dissipates.
  2. Apple (AAPL) | 7.19% Weighting

    AAPL currently holds the best BQS score I’ve seen since I began using the tool, an almost-perfect 99.

    The recent earnings report was a mixed bag, however. AAPL beat on both revenue and EPS, but lower demand in China is eating into its revenues, which were down over 1% from a year ago. The company also posted its fourth quarter of sales declines, the first time that’s happened since the bursting of the dot-com bubble.

    AAPL is a remarkably robust company, but we should be wary of any cracks that could knock it down a peg. Especially with its large weighting in the S&P 500.
  3. Amazon (AMZN) | 3.45% Weighting

    Amazon sits in the top half of BQS scores in this list, with a 91.

    And in its most recent earnings report, the company beat on both EPS and revenue, with a strong EPS beat of over 60%. Its revenue also grew 12.5% year-over-year.

    AMZN is in a slightly more precarious position than the others in this list, I’d wager, due to its role as the largest consumer discretionary stock. If the Fed’s rate hikes are finally beginning to slow the economy, consumers will begin to think twice about luxury Amazon purchases, shopping at Whole Foods, and potentially even keeping their $139-per-year Prime memberships.

    It also makes up the third-largest chunk of the S&P 500, at 3.45%.

    AMZN is one of the stocks to watch for signs of cracks in the system, especially if the economy really begins to slow down.
  4. Nvidia (NVDA) | 2.91% Weighting

    NVDA, too, sits in the upper crust of the BQS with a score of 95.

    Nvidia hasn’t yet reported earnings, but is set to later this month on Nov. 21. Its April earnings report was an absolute blowout, with $13.5 billion in revenue against $11 billion expected and an EPS beat of 30%. That report was enough to send the stock 5% higher before the entire market began to collapse in August.

    Its previous report had an even bigger impact, sending the stock 31% higher in a move that marked the beginning of the 2023 A.I. mania.

    All these big earnings moves set high investor expectations for NVDA stock, so we should tread carefully around its earnings report later this month.
  5. Alphabet (GOOG and GOOGL) | Class A and Class C shares make up 3.93% Weighting

    Next up is Alphabet, with a strong BQS of 87.

    Alphabet’s recent earnings report invited a quick selloff as investors were unimpressed with the growth of its cloud business, which had previously been growing faster than its biggest competition from Microsoft and Amazon.

    Despite this, the stock still beat on EPS and Revenue at 7% and 1.2%, respectively. The company grew revenue 11% over the previous quarter, an impressive figure for a stock of this size.

  6. Meta Platforms (META) | 1.92% Weighting

    META has had a stunning recovery in 2023, after its full-throated pivot to building the “Metaverse” ran headlong into the bear market of 2022, when the financial world quickly stopped caring about such pie-in-the-sky trends.

    Its business has clearly held up despite the pivot, too, with a BQS of 85.

    Its recent earnings report was also strong. It beat EPS expectations by 18.54%, and had a slight beat on revenue, with $34.15 billion reported versus $33.45 billion expected.

    META stock is up more than 150% so far in 2023, and the trend appears tremendously healthy. Of the Magnificent Seven stocks, this is one I’m least concerned about.
  7. Tesla (TSLA) | 1.56% Weighting

    TSLA is the sore thumb sticking out in the Magnificent 7. Its BQS is a solid, but relatively poor 75 out of 100.

    It’s also had the roughest earnings season out of any other Magnificent Seven stocks. It reported EPS of $0.66 against expectations of $0.73, a miss of nearly 10%. And it missed on revenue by 3.29%, with reported revenue of $23.35 billion against $24.14 billion expected.

    Year-to-date, the stock is up over 100%, but it’s now 25% down from its highs.

    TSLA may represent the smallest share of the S&P 500 out of the Magnificent Seven, but it represents the biggest risk of the group.
If the generals are going to be the only ones heading into battle, we should be somewhat comfortable with the fact that they’re all in solid shape.

The Business Quality Score is included in your TradeSmith Platinum membership. You can find the score for any stock you follow at the top of the stock’s position card page — right along with the Health Indicator, VQ, trend, and Trade Cycles turn area metrics.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily