The Magnificent Seven's Powerful Rise in 2023 After a Sharp Decline in 2022

Navigating year-end market forecasts, economic reports and stock events

• In light of the Magnificent Seven's dominance and AI's influence, we contrast 2023 gains with 2022's losses.
• With a market slowdown expected, we note some individual stock events shaping market direction.
• Pivotal economic reports are forthcoming as we examine the potential for choppy trading.

As the markets reached the end of a notable streak, closing out a seventh consecutive week of gains, Friday saw a minor shift. The S&P 500 experienced a marginal 0.1% downturn, while the Nasdaq Composite demonstrated a 0.4% uptick. Despite these subdued day-to-day movements, both indices closed the week with gains exceeding 2%. With Christmas on the horizon and many preparing for time off, a gradual slowdown in market activity is expected as the week unfolds.

Certain themes emerged in the market during the past year. While interest rates played a significant role, the year was characterized by the buzz around artificial intelligence (AI). This technological domain took center stage in discussions, echoing the dot-com boom and blockchain fervor. AI's mere mention has influenced market dynamics.

The volatile seven

The emergence of what has been dubbed the "Magnificent Seven" seized market dominance this year. Comprising Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA), these entities boast direct or indirect affiliations with AI. Collectively, these stocks surged by a staggering 75% over the year, contrasting sharply with the remaining 493 companies in the S&P 500, which posted a modest 12% gain. Remarkably, these few companies now command a striking 30% representation in the S&P 500 index.

Notably, a stark contrast emerges when we look back just a year. The same seven stocks now hailed as "magnificent" had suffered a 40% plunge, while the rest of the S&P 500 had dipped by 12%. Surprisingly, despite their gains in 2023, Alphabet, Amazon, Meta and Tesla remain below their 2021 year-end values, as reported by The Wall Street Journal. Maybe we should call the the volatile seven.

While a gradual slowdown in trading activity is anticipated as the year draws to a close, certain events possess the potential to sway market sentiments. The economic calendar for the week brims with significant releases, including housing start data tomorrow, existing home sales on Wednesday and the pivotal personal consumption expenditures (PCE) report scheduled for Friday. Particularly intriguing, the timing of the PCE report amid expected light trading volume just before Christmas could provoke an immediate and perhaps exaggerated market reaction.

Individual stocks

Amid this landscape, several individual stocks are poised to make headlines. Notable events include the Nippon Steel (NPSCY) acquisition of United States Steel (X) for $14.9 billion, Southwest Airlines (LUV) facing a $140 million civil penalty, and forthcoming earnings reports from Micron Technology (MU), FedEx (FDX) and Nike (NKE) are among the notable events. Additionally, ongoing restrictions Apple faces in China are influencing its growth markets significantly and could pose challenges to the tech giant's revenues.

Market volatility, reflected in the Chicago Board Options Exchange's volatility index (VIX) low close at 12.28 on Friday, coupled with the consecutive closure of the 10-year notes' yield below 4%, suggests a relatively stable environment. Despite an anticipated decline in trading volume, the convergence of earnings and economic calendars might inject fresh dynamics into the markets. Notably, the Monday following a quadruple witching often witnesses volatility as traders manage pending positions. In navigating these potential market shifts, adhering to established investment strategies and long-term objectives remains prudent.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan 

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