Why the next 4 weeks could mark a major turning point for the economy

We’re approaching the height of corporate earnings season, an important time of the year for those of us with money invested in U.S. stocks. And from now through mid-November, the quarterly numbers emanating from what I call the Select Seven companies will be especially important.

Here’s why. For the first eight months of the year, the Seven—Apple, Microsoft, Amazon, Nvidia, Alphabet (formerly Google), Tesla, and Meta (formerly Facebook)—punched way above their weight, lifting the rest of the market.

But in September, stocks of the Seven underperformed the rest of the market, dragging down overall results.

The Seven’s upcoming earnings reports, due to be released on dates ranging from October 18 for Tesla through November 15 for Nvidia, could have a meaningful financial impact even on those of us (like me) who don’t own shares in any of the Select Seven but have lots of investments in index funds.

We’re not talking just about money here. If the Seven retain their dominance, they could have a sizable influence on consumer confidence by adding lots of employees and building new facilities, as Tesla is doing. Or by helping to create future technological breakthroughs, as Nvidia’s graphics processing units and its work on artificial intelligence are doing.

Rare concentration at the top

Let me take you through some of the math to show what the Seven have meant to the market. And why their upcoming earnings reports matter.

Through September, the Seven accounted for 75.7% of the Wilshire 5000 Total Market Index’s return for the year, according to numbers that Wilshire sent me. That’s more than triple the Seven’s combined 23.8% weight in the index as of the end of September. (I’m using the Wilshire—which had 3,410 stocks and $42.6 trillion of market value when last I looked—to show you how important the Select Seven have been in terms of the total market’s results.)

The difference between the Seven’s weight in the index and their share of the Wilshire’s results means that the Seven have produced total returns (price gains plus reinvested dividends) that dwarf the collective returns of the other 3,400 or so stocks in the Wilshire.

Having a mere handful of stocks wield such enormous influence is very unusual. “I haven’t seen this big a concentration at the top since I joined S&P in 1977,” says Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

As a result of the Seven’s terrific performance from the start of the year through August 31, their combined Wilshire weight rose to 24.2% from 18.6%.

Their influence would be even greater if we were benchmarking them against the Standard & Poor’s 500 Index, which had 503 stocks and $37.8 trillion of market value at the end of September.

As you can see from the month-by-month numbers (see chart, below), in February and May the Seven accounted for more than 100% of the Wilshire’s total return. That’s astounding—that means that the index would have lost value but not for this small handful of stock over-performers. And in March, they accounted for almost the entire return.

But in September, when the Wilshire had by far its worst month of the year, posting a loss of 4.5%, the Seven’s weight declined to 23.8% from 24.2% at the end of August. That means that the Seven did worse than the rest of the market did.

That pattern continued this month, with the Seven’s weight down to 23.6% as of October 9, the point at which I had to stop looking at numbers and start writing.

What’s behind the slump?

Analysts say that a major reason for the post-August decline is that many investors became convinced that higher interest rates imposed by the Federal Reserve since early last year are here to stay.

Before the Fed rate increases started in March of last year, the yields on money market funds were 0.02%, according to Peter Crane of Crane Data, the go-to source for money market fund numbers. That made dividend-paying stocks far more attractive to income-seeking investors than they would have otherwise been. So investors flocked to them, driving up their prices.

But these days, many money funds are yielding more than 5%. That has led many income-seeking investors to move away from stocks into money funds and other interest-bearing securities.

“A reassessment of the U.S. interest rate trajectory for 2024 has disrupted the market rally and led to a surge in U.S. bond yields,” says Philip Lawlor, Wilshire’s managing director for market research.

Six of the Select Seven—all except Tesla—are pure technology stocks. And, Lawlor says, “Technology was the biggest drag on third-quarter returns, but the sector was still up 40.7% through September.”

The Seven’s upcoming earnings announcements will help determine whether the market, which is still up double digits despite the drop that began in September, will rise again.

Will the Seven’s earnings reports boost their stocks and provide a disproportionate gain to the overall market? Will the reports sink their stocks, causing disproportionate losses?

I don’t know, nobody knows. What I do know, though, is that however the Select Seven’s earnings reports turn out, they’re going to be important. And they’re likely to be interesting.