The S&P 500 is back in record territory as the 'Magnificent Seven' ride to the rescue

By Joseph Adinolfi

The elite group of megacap tech stocks is back to being the workhorse of the U.S. equity market

Riding to the market's rescue: the "Magnificent Seven" group of megacap tech names.

After trading sideways for much of the past year, the "Magnificent Seven" have been staging a comeback, helping to re-energize a bull market threatened by rising bond yields and stubbornly high crude-oil prices.

On Tuesday, the S&P 500 SPX tallied its first record high since Aug. 13, according to Dow Jones Market Data. Between the previous record high and Tuesday, the index has largely depended on a handful of megacap stocks for gains - a familiar dynamic that helped define the earlier stages of this bull run.

Led by strong gains for Nvidia (NVDA) and Meta Platforms (META), the group of megacap tech names known as the Magnificent Seven finished Tuesday with a combined market capitalization of $24.95 trillion, according to Dow Jones Market Data - ending just shy of hitting the $25 trillion mark for the first time. Both the Nasdaq Composite Index COMP and an ETF that tracks the Magnificent Seven MAGS booked a second straight record closing high Tuesday.

These megacap names had struggled earlier in the year, with even the mighty Nvidia trading sideways for months. While the Magnificent Seven drifted, there was a boom in semiconductor stocks SOX, industrials and shares of other companies expected to benefit from the immense spending being plowed into the artificial-intelligence build-out.

At one point, there was talk that the Magnificent Seven were being used as a funding short - hedge-fund code for investors shorting the group, or betting against the megacaps, and betting on semiconductors and other "bottleneck" names of the AI infrastructure boom. Higher oil prices (CL00) (BRN00) also helped boost energy stocks in the S&P 500 SPX, as the below chart shows.

Fortunes started to change in July, as investors endured a historic reversal in the AI-fueled momentum trade. Investors crowded back into megacaps and hard-hit software names, as well as shares of non-AI companies. Then, beginning in August, software stocks, semiconductors and the megacaps started moving higher in unison, as investors saw the tech sector as the best bet for resisting the pull of rising interest rates.

On Tuesday, Nvidia - the most valuable publicly traded company in the world, with a market capitalization of more than $5.76 trillion - saw its market cap climb closer to hitting the $6 trillion mark for the first time, according to Dow Jones Market Data. Strong gains for Meta have also recently helped the tech sector make up for weakness elsewhere in the market. At the same time, semiconductors and software names have been trending higher in tandem recently.

It is just the latest example of investors taking shelter in tech stocks when interest rates climb.

"They've had a really strong two-month run, and at this point have effectively caught up with the S&P 500," said Mike Dickson, head of research and quantitative strategies at Horizon. "It's been a bit of a catch-up trade, frankly."

Safety in size

As global bonds sold off, rising yields put pressure on small caps, utilities and home builders - all corners of the market considered particularly sensitive to interest rates.

At the same time, worries about high energy prices driven by the ongoing U.S-Iran conflict and the attendant economic fallout were weighing on areas such as financials and consumer-discretionary stocks, which are more sensitive to the health of the economy and the consumer.

"You had two huge cyclical headwinds that weighed on corners of the market that are more sensitive to interest rates and the economy," said Ross Mayfield, an investment strategist at Baird Private Wealth Management.

As the rest of the market wobbled, investors crowded back into tech.

"The AI build-out isn't going to stop because of one or two rate hikes," Mayfield said. The Federal Reserve in September delivered its first interest-rate hike in three years, redoubling its efforts to tackle inflation. Another hike is expected this year, according to interest-rate futures markets.

The fact that so few stocks have meaningfully participated in the rally over roughly the past six weeks has been frustrating for some investors, Mayfield said.

"There's a lot of angst out there about this narrowness in the market," he said. "Ideally, you'd rather have a broader market, all else equal. But as long as the biggest and most influential stocks in the market are working, I think that's a good thing in the end."

After touching its narrowest level on record recently, there have been signs that breadth is making a comeback, as more stocks and sectors have turned higher over the past few sessions.

On Tuesday, 10 of the S&P 500's 11 sectors finished in the green for a third straight session for the first time since December 2023, according to Dow Jones Market Data.

Michael DeStefano contributed.

-Joseph Adinolfi

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10-06-26 1752ET