The Magnificent Seven Stocks: How They Drive the S&P 500

The Magnificent Seven is the nickname for seven mega-cap tech stocks, including Apple, Microsoft, Amazon, Alphabet, Nvidia, Meta, and Tesla, that together make up roughly a third of the S&P 500 index. In this episode, Ryan explains how market-cap weighting works and why these seven companies can move the entire index on their own.

The practical takeaway is about diversification. Investors who think owning an S&P 500 fund means owning a broad slice of the economy are actually much more concentrated in tech than they realize. Ryan and Aaron walk through what this means for portfolio construction and why understanding how the index is weighted matters before you assume you are diversified.

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And, as always, Stay the Course!

Transcript

Welcome And Listener Shoutouts

Speaker 0:01

Welcome to the Fiscal Physical Podcast. Join us this week is we sit down with the founder of Alchemy Wealth Management and author of your physical physical, Ryan Nelson. Tune in to gain valuable insights and practical tips as we simplify complex financial concepts into digestible lessons. From budgeting to retirement planning, this podcast is your go-to resource for mastering financial literacy.

Aaron Hoisington 0:33

Welcome everybody. This week's episode of the Fiscal Physical Podcast. My name is Aaron. I am here with Ryan Nelson, founder of Alchemy Wealth Management. Uh, one of my good friends here. And uh, Ryan, how is uh how's how's how's how's life treating you these days? Life's treating me well. How's life treating you? You know, can't complain, man. Besides the back pain, I'm I'm I'm in heaven here. So uh but uh uh this week I'm I'm excited to dive into this week's topic. Um I guess I should pause a second here. Thanks everybody for listening. We really appreciate it. We're uh you know into the hundreds of episodes here and uh um you know couldn't do it without you guys. So big shout out to the listeners

Setting Up Today’s Topic

Aaron Hoisington 1:09

there. So um but uh you know today we're gonna hopefully break down a topic that I found pretty interesting. Um so I'll give a little backstory here, Ryan, on how I came up with this uh topic. I get a I I get a financial like email. I think it's sent through Yahoo every day. I don't know if I signed up for it or whatever, but they send it to me and it's kind of interesting. Um, but they talks about like, oh, what's going on, who's reporting that day for stocks, for earnings and such too, and like what's going on, what's affecting things, and and the term keeps getting thrown around or was thrown around quite a bit of magnificent seven. The magnificent seven. So um I did a quiz to see if I could name those seven, like uh, and I failed. Uh but i I was like, this would make a really good podcast topic. So um I don't know if our listeners are aware of the Magnificent Seven, and if you are, I I'm gonna give you guys a two-second pause to think about it, see how many you can name here. So let's have a little bit of dead air. All right. Hopefully that was fun for everybody. Hopefully you named all seven in that time.

What The Magnificent Seven Are

Aaron Hoisington 2:12

But uh um, Ryan, could you could you maybe break down what the magnificent seven are, like kind of the history of it, or and kind of how it's how it's important, or if not, or what it really means, because I'm super curious.

Ryan Nelson 2:23

Absolutely. Yeah, so the Magnificent Seven is just a nickname for the set what we'd call the seven megacap. So there's like uh small caps gonna be small companies, mid-caps, medium-sized companies, large caps, large companies. So mega cap is gonna be the ultra-large companies. So this is like a nickname for the seven what we call mega cap. They're all happen to be tech-driven stocks that effectively are kind of leading the market right now. So um for those that were guessing, it's Apple, Microsoft, Amazon, Alphabet, Nvidia, and oh, Meta and Tesla. And um, so really it's just kind of a term that popped up kind of in financial media, uh, and it really does just explain those seven stocks. And they are the primary contributors of the SP 500.

How Market Cap Weighting Works

Ryan Nelson 3:10

So when you hear people talk about the the all oftentimes people will talk about the stock market as the S P 500. So they're talking about the stock market, they're saying, oh, the stock market went up or the stock market went down. Usually what they're referring to is the S P 500 went up or the S P 500 went down, which is a uh sort of an index that weights the 500 biggest comp more or less the 500 biggest companies in the country. And but what how it's weighted is it's what's called market cap weighted. So the bigger companies have a bigger percentage uh role in this in this um um what am I saying? Index.

Aaron Hoisington 3:45

Yeah. And so who's the financial advisor? Yeah, exactly.

Ryan Nelson 3:50

So these seven companies, right? So like Apple, Microsoft, NVIDIA, these companies are so big that they represent such a large piece of this index, and there's some whatever that 500th company is, is gonna be so small in comparison to them, right? So even though these are only seven companies of the 500, so they should only represent like one percent of the index, in reality, they represent a large a much larger share than that. And so they largely can drive the index. If these seven companies have a good day, the SP 500 probably had a good day. So again, I I think I've made an example before, like in theory, like maybe the other right 493 companies could all be up on one day. If these seven stocks are down, it's possible when you look at the SP 500 index, it's possible the index will show you negative. Right. But does that mean the stock market was down that day? Well, these are driving the S P 500 index. So in reality, if if you owned a bunch of different stocks, you might look at your portfolio and say, Man, I had a great day today. Oh, these seven stocks went down. Sure. So the SP 500 looks like it went down because it did the way it's measured, it went down. Um, and the opposite could be true. So those seven companies could have an amazing day. The other 493 companies could have had a bad day, but it might still look like the SP 500 is up based on because these seven have such like an outsized impact on the uh index, which again a lot of people loosely call the stock market. Sure. Um, so it's kind of interesting. And all of them, you can see they're all tech companies, right? So Apple, Microsoft, Amazon, Alphabet, which is Google, Nvidia, Meta, which is Facebook, Tesla, they're all these tech companies. And so now as you think about the SP 500 and its performance, and now we're saying, okay, it's largely being driven, or at least there's a large percentage of it is being driven by these seven companies, all of which are tech companies. Well, is the SP 500 representative of the stock market? Is it just representative of tech industry, right? You can start to see why the magnificence magnificent magnificence seven um has like an impact. Is it good or bad? I don't think it's good or bad. It's just important to realize sort of what they are, how they impact the market, and what the SP 500 is. Um, and as long as you understand all of that, I don't think any of this is good or bad. Sure. But but but it is important to realize sort of how these seven stocks impact the SP 500 and again, therefore impact how most people perceive the stock market.

Aaron Hoisington 6:18

Yeah, no, that's a great call. Because immediately, like just just saying what you're saying, if I was to say, like, hey, cool, like you have, you know, 500 contributors to you know, whatever, but these are the top seven, like that control like a vast majority of it, immediately I'd be like, hmm, I don't know if I want all my eggs in like that specific basket. Right. Um it seems like you know, if you're if you're we've talked about um, you know, port portfolio management and balancing portfolios and such too to make sure that you're you know in these that can can can if something goes bad, stocks, bonds, lifeboats. You guys, if you guys know what I'm talking about, you uh you've uh

Concentration Risk In The S&P 500

Aaron Hoisington 6:55

you've listened to the previous episodes there. But it is interesting to think about that these seven um do you know what percentage they make up of the SP 500?

Ryan Nelson 7:02

I I was just about to ask you that. So so so seven out of five hundred. Love true, yeah. So that's one point four percent. So the seven so the seven companies out of five hundred, so they rep they represent one point four percent of the total companies. Okay. What percent of them of the actual um um index do you think they represent from the market weighted standpoint? That's a good that's a great.

Aaron Hoisington 7:21

I'm glad I was like, I was just thinking, I was like, oh, I wonder if you know that. And I was like, do I know that? Um I'm gonna say it is I'm gonna say it's 56%. Good guess? That's never a never a good guess. Never a good sign. Never a good sign.

Ryan Nelson 7:37

They represent about a third. Oh, yeah. So it's gonna change every day depending on how they do and how the other companies do. But they represent about those seven companies represent about about a third of the S P 500 index. Um so if you think about the S P 500 index, a third of it's driven just by these seven companies, and then the other, you know, two-thirds is driven by 493.

Aaron Hoisington 7:58

Right. Okay. Well, that's honestly not as big as I maybe thought, but at the same time, for seven companies, it's still pretty a big chunk of the pie there that are in those uh specific seven there.

Ryan Nelson 8:08

Yep. Um, yeah, so um, so that's why they're I think important to be aware of. Um it is you know, I I would say there's nothing special per se about these companies. They just happen to be the biggest right now. Are you familiar with Fang stocks? No, no, I'm I'm not.

Aaron Hoisington 8:27

But have you ever heard the term? I I've heard I think I have heard Fang before, but it's like F like double A kind of thing. But I I I know that one of them's Facebook. So that's exactly so probably Apple would just be my other guess. Yeah, yeah. Okay. Yeah, you want to guess all of them? No, that's all I got. Okay, so uh good guess. Thank you.

Ryan Nelson 8:46

So uh if we uh yeah. I think some of our earliest episodes we probably talked about Fang, but so Facebook, Apple, Amazon, Netflix, Google is what Fang. So it's an acronym acronym representing those five companies. And so what's interesting is like Fang used to represent the big companies, right? Okay. Now it's the Magnificent Magnificent Seven. Um, so it's not like these seven companies are gonna dominate the SP 500 forever, right? Things are gonna evolve and change, like NVIDIA came into the mix, right? Netflix is no longer in the mix, so to speak. Yeah, yeah. Um so these companies, you know, it's always gonna be evolving. So there's nothing special about the Magnificent 7. I think it what's more important is acknowledging like how the SP is created, how the SP 500 index is created, um, and acknowledging that because it's market weighted, these big companies at the top have such an outsized impact on the on the um index as a whole. Um so I think that's the the bigger takeaway here. And these seven companies, while they're incredibly large right now, again, 10 years from now, it could be a different seven companies, or similar to Fang, Facebook, Amazon, Apple, Netflix, Google, you can see there's some repeat offenders where they were in Facebook as meta now, so it's still in the Magnificent Seven, Apple's still in there, right? So there's some repeats there. So a lot likely 10 years from now, some of these probably will still be some of the biggest companies, and maybe a few of them aren't. And there's probably a new company that you and I aren't thinking about now that may be bigger than all of these, right? Totally. Yeah, nobody, NVIDIA was probably wasn't on anybody.

Aaron Hoisington 10:13

I'd never heard of NVIDIA until like two years ago. Maybe it was uh that's a that's an interesting point.

Ryan Nelson 10:20

So this would be another thing we've talked about in the past. Like um some people will just invest in the S P 500 and uh that and only the SP 500. They say, though, that's plenty diverse because that's represents 500 companies. And again, though, as you think about how the SP 500 is structured, are you actually diversified across 500 companies? Or really what that means is you're putting 33% of your net worth in seven companies. Right. So you may be kind of conceptually thinking, oh, as I just invest in the SP 500 and that's good enough. Um I'm well diversified. As you start to think about this, you may actually realize, oh wait, actually, I guess what that means is seven these,

From FAANG To Magnificent Seven

Ryan Nelson 10:56

you know, 33% of my net worth is in seven companies, effectively. All of them are effectively tech giants. Oh, so maybe I'm less diversified than I think. And also, guess what? A lot of that other 66% is also tech, right? So when you start looking at your total exposure, you're like, oh wait, maybe I'm maybe I'm not as diversified, not really spread out into as many companies as I thought. And maybe I'm not even diversified across all the sectors as much as I want to be. So it'd be something to think about there if you're if you're one of the people who just invests in S ⁇ P 500, maybe this is a little bit eye-opening and you can start to realize like, oh, maybe, maybe this isn't at quite as diversified as I thought. Um yeah, but I think uh yeah, it's it's nothing magnificent about it in the sense there's more special than Feng. Um or what you know, whatever the big companies will be of the future. It's really just more understanding that concept. Yeah, absolutely.

Aaron Hoisington 11:48

And I'm I'd be really curious to see what what and who like the the next like big acronym is that that's what when you mentioned like Fang, I was like, I have heard that before. Like I and I was thinking, I was like, I wonder what some of the other ones are because they're always gotta be catchy and fun, like the magnificent seven, like that's got a nice ring to it kind of thing, too. So it's like, is it gonna be the the the top ten or whatever comes next or whatever? So uh be interesting to see kind of how that uh you know in the historical context of it, how it moves forward. So um awesome, Ryan. I appreciate it, man. We'll go ahead and uh take a pause here, be back on the other side of this. Uh everybody hang tight with us.

Speaker 12:22

And now to put the personal in personal finance.

Aaron Hoisington 12:28

Welcome back, everybody, to this side of the physical physical podcast. I am still here with Ryan and uh I got a fun little teaser. So if you're uh if you're uh listening in here, I'd really like you to lock in and because I think you're gonna you're gonna this is this is a good one here. I I'm curious to see everybody's answers. So um my question to you, Ryan, is would you rather have a guaranteed one million dollars? So I can guarantee you here's a check for one million dollars. Yeah, that sounds nice. Yeah, it would sound great. Or I can give you a chance, uh, a a 75-25 percent so a 75% chance of of getting of instead of one million, getting five million. So if you 75% chance you're gonna get five million, 25% chance you don't get anything. Yeah, you got the guaranteed one million, or you pretty much got a game of chance, 75, 25 in your favor, to uh to get five million. How would you how would you approach that? Five million.

Ryan Nelson 13:22

Yeah, 75% of five million, seventy-five percent chance of five million, yeah. Absolutely.

Aaron Hoisington 13:26

What about you? That's that's that's so funny. I was uh I when this question was originally I found this question, I was like, oh man, it was fifty-fifty is what the the odds were,

Are You Actually Diversified

Aaron Hoisington 13:35

and I was like, I'd probably take a million dollars, like at 50-50. But when it started to skew, I was like, at what point am I comfortable? Like, do I think that three out of four chances I have to get five million dollars? Sure. And the the gap between one million and five million is so much, it is a huge gap right there. So that being said, I take the one million. I still think I would. Yeah, I still think I'd take the one million dollars. Just somebody guaranteeing, like, because I I've you know, I I I've played roulette and craps, and sometimes I feel like I have like a 75% chance of winning. Yeah, and I and I've I've been burned before with that too. So um it is it is one of those things, obviously it depends on everyone's financial situation and such too. But I'm I was really curious, I was I was thinking you'd do the five million.

Ryan Nelson 14:20

I thought that was do you know like the term expected earnings or expected winnings? I don't think so. So I mean I've heard the term. So like in the in this example, you would say, okay, the mil the one million dollars, you have a hundred percent chance of getting it. So you'd multiply a million by a one hundred percent chance. So if you went with that option, on average you're gonna make a million dollars, right? The other option, you have 0.75, 75% times 5 million. So your expected earnings on that option would be 0.75 times 5 million, which is if I'm doing my math right, 3.75 million. Um, in the two options, if you go with the million option, like on average, you'll make a million dollars because every time you're gonna make a million dollars. Sure, sure. If you go with the five million dollar option, your expected earnings. So on average, if you had if you had a thousand chances of doing this right, doing this, right? On average, if you went with that option every time, you'd walk away with 3.75 million dollars on average. So almost four times as much money as the as the the million dollar. So yeah, I would definitely go with the 75% chance at $5 million. Um in that ex in this example. Yeah. Where I think it gets more interesting, even if even at 50%, I think I would still definitely go with the five million. Yeah, really. Where I think it's more interesting is a 25% chance. Sure. So if you had a guaranteed million or a 25% chance at 5 million, sure, now your expected earnings would be a million dollars, 100% chance at a million would still be a million.

Aaron Hoisington 15:37

Yeah.

Ryan Nelson 15:38

25% chance of five million, your expected earnings would be 1.25 million. So now that's starting to get a lot closer. It's like do you want a guaranteed one million or

Teaser: Million Vs Five Million

Ryan Nelson 15:48

an expected return of 1.25 million, but it's variable and you only have a basically you have a 25% chance of hitting 5 million or a 75% chance of hitting zero, that's where it starts getting a lot closer. That's where, you know, statistically speaking, you should still go with the the x where this expected odds give you 1.25 million. So theoretically, it's you know, like just from uh dollars and cents like Excel spreadsheet, like mathematical answer should still be you'd go with the five million at 25% chance. But since you only live one life, that's where it starts becoming a lot closer, and where you I think I might go with a million at that point. Yeah, at that point, yeah. Um, but yeah, so for me, I think I'd go 75% chance to get five million, I'd do it. Even 50% chance to get five million, I'd do it. 25% chance to get five million. I understand mathematically you should still do it. I might lean towards a million at that point. That's fun, man. That's awesome.

Aaron Hoisington 16:38

I'm glad that that was way better than I thought. That answer was gonna that that question. I love it when it turns out like that. We're like, shoot, when you break it down like that, line me up for five million. Would you? Or would we still go to that? It's really still good. Yeah, yeah. It's one of those things like in my everybody's situation is different. And like I think about like the idea of like back in the day, like having a million dollars is like this, like, oh, but now I can't really retire with a million dollars. It's just not gonna be a but it I think it could significantly, if used correctly, change my life for the the better, or really give you know a really good opportunity to set myself up quite well financially. And so

Expected Value And Risk Tradeoffs

Aaron Hoisington 17:15

I think having that blanket of security there, I think would probably be where but obviously there's a lot of factors going to this taxes and how you get into whatever, but I'm not even worried about that. But I think I'd still do the the one million and then you know just give it to my financial advisors and then he'd then he'd turn that into five million exactly real quick.

Ryan Nelson 17:34

Well, the the nice thing about that if you got the guaranteed million is that it's like the time value of money. So if you get a million dollars, say in your mid-30s, and we talked about in the past the rule of 72, and and it's maybe theoretically possible, at least for easy math on this call or on this conversation, we could think about you maybe doubling your money every 10 years, every 70 years. I'd say every 10 years, sorry. So if you doubled your money every 10 years, what that would mean is hey, if you got a million dollars today, if you're in your mid-30s, when you're in your mid-40s, it'd be worth two million. When you're in your mid-50s, it'd be worth four million, when you're in your mid-sixties, it'd be worth eight million. You know, so you could look at that through a different lens and say, hey, maybe that million dollars today is worth eight million dollars in retirement. Um, that goes a long way. So I want that. Totally. Um granted when I do the 75%. Now when I do the 75% chance five million. Say math applies. Exactly.

Aaron Hoisington 18:24

It does, it really does. And that that's where you start to see though that growth, if you will. So um fun stuff. Uh uh love it if the listeners chimed in. Let me know what you uh how'd you do it. There's anything else that would uh we're not thinking of that you'd factor in, uh, definitely let us know. Um appreciate everybody tuning in here. And uh, Ryan, I'll uh give you the last word here. As always, stay the course.

Speaker 18:45

Thank you for joining us for the Fiscal Physical Podcast. Until next time, happy listening. And as always, stay the course. If you have a question or topic suggestions, please email us at podcast at alchemywealth.com. If you enjoyed today's discussion, subscribe to the podcast to ensure you never miss an episode. And consider leaving us a rating and review on your favorite platform. This helps other listeners like you find the channel. For more resources, you can visit Alchemy Wealth Management's website at www.alchemywealth.com or find your fiscal physical book on Amazon. We'd be remiss if we didn't mention the personal finances just then. First of all, please don't take anything we say as advised. The presenting content is for informational and entertainment purposes only. It's not an offer or a solicitation, nor should it be construed or relied upon for tax, legal, or investment advice. It doesn't consider your personal financial situation or objectives and may not be suitable for you.