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WHO CONTROLS THE STOCK MARKET

I have made many statements about the stock market being rigged, but one question I have yet to answer is who are the major players for the rigging of the stock market. When it comes to mega cap stocks, there are many factors at play that affect their evaluations. However, before we get there we need to discuss the market benchmarks; specifically, the SPY. 

The SPY is an ETF (Exchange-Traded-Fund) that tracks the SPX. The SPX is the Standard & Poor’s 500 Index, also known as the S&P 500, or just the S&P. The S&P is composed of 500 companies (503 stocks), and this is how the index gets its valuation. Each company does not contribute equally to the S&P’s value: the larger a company’s market cap, the larger the impact on the S&P. Thus, the larger companies impact the S&P more than the smaller companies do. The term used for this is the S&P 500 is a “weighted” index. 

Further, the S&P is considered a benchmark for the markets: it is used to determine the financial health of the economy. There are two large differences between the SPX and the SPY. First, the SPX cannot be actively traded; although you can actively trade options on the SPX. Next, the SPY is 1/10 of the SPX. 

First, market expectations determine the company’s future and thus valuation (stock price). Each quarter after earnings are released, part of the market’s response is based on market expectations. If the company beats earnings, then usually, the stock will have a favorable move. That is usually. There have been times when a company beat market expectations and the stock fell (META recently). There have also been times when a company missed on earnings and the stock shot up (TSLA recently). 

Two other common factors for causing stock movement are news for a specific company and economic events. Favorable news/announcements? Favorable moves (with an asterisk). Who decides if these events are favorable? The market, or people. Who decides if earnings are favorable? People. What does this tell us? People control the market. 

How do they do that? Remember, companies’ valuations determine the price of the SPX (and SPY). So if a company has favorable news, this is in favor of positive movement for the SPX (or the overall market). Keep in mind that not every company has the same impact on the SPX and thus the market, because the S&P is a weighted index. Company news is more relevant for the “big dogs”, or the companies who carry the most weight in the SPX. Who are the “big dogs”?  

Cue the Magnificent Seven. The Magnificent Seven are the top seven companies that have the greatest impact on the S&P 500 and thus have the greatest impact on the overall market. The top seven companies have changed, as we will see shortly, primarily due to TSLA’s under performance, but the Magnificent Seven remains the same. For the remainder of this article, I will focus on the SPY as it is directly correlated to the SPX; on to equity movement. See below for the list of the Magnificent Seven and their overall weight of the SPY as of September 21, 2023. (Source: https://www.investopedia.com/ask/answers/08/find-stocks-in-sp500.asp)

  • Apple (AAPL): 7.05%
  • Microsoft (MSFT): 6.54%
  • Amazon (AMZN): 3.24%
  • NVIDIA (NVDA): 2.79%
  • Alphabet Class A (GOOGL): 2.13%
  • Tesla (TSLA): 1.95%
  • Alphabet Class C (GOOG): 1.83%
  • Meta (META), formerly Facebook, Class A: 1.81% (#9 largest company)

Looking at the data above, we can see that the Magnificent Seven control just over 27% of the overall market. On September 21, 2023 the SPY was trading at 431. Since the end of last year, we have been on a pretty strong bull run. How big has the bull run been? Near its peak on July 10,2024 the SPY had increased 30.16%. During this time, the SPY was trading at 561. July 10, 2024 was a significant date, because the SPY was approaching its current All Time Highs of 565 and the Magnificent Seven were at their peaks. First, let’s see how much each company increased over this time:

  • Microsoft (MSFT): 47.08%
  • Apple (AAPL): 33.29%
  • NVIDIA (NVDA): 224.22%
  • Amazon (AMZN): 54.73%
  • Meta (META), Class A: 78.78%
  • Alphabet Class A (GOOGL): 46.78%
  • Alphabet Class C (GOOG): 46.79%
  • Tesla (TSLA): 7.51%

As seen above, the only company to underperform the SPY was TSLA (7.51% growth compared to the SPY’s 30.16% growth). Moreso, at the end of June 2024, TSLA was actually in the red on the year (-25%) until its recent push. Now, let’s see how much each company’s weight on the SPY changed in the past nine months (source: https://www.slickcharts.com/sp500):

  • Microsoft (MSFT): 7.29%
  • Apple (AAPL): 7.03%
  • NVIDIA (NVDA): 6.9%
  • Amazon (AMZN): 3.90%
  • Meta (META), Class A: 2.48%
  • Alphabet Class A (GOOGL): 2.37%
  • Alphabet Class C (GOOG): 1.99%
  • Tesla (TSLA): 1.55% (#11 largest company)

To no surprise, TSLA is now out of the top seven companies and is actually the 11th largest company in the S&P. However, the Magnificent Seven collectively now controls just about 33.5% of the overall market. On average, each of the Magnificent Seven contributes 4.79% of the overall market, while the remaining 493 companies on average each control 0.13% of the overall market. 

As mentioned above, from September 21, 2023 to July 10, 2024 the SPY grew 30.16% and the Magnificent Seven were responsible for over half of the SPY’s growth (roughly 55%). This means the other 493 companies were responsible for the other 45% growth on the SPY. Put another way, the other 493 companies on average contributed about 0.09% each to the SPY’s growth. 

Now, here is the big question for the remainder of the year. What’s going to happen next? There are four options: 

  1. The Magnificent Seven continue to drive the SPY 
  2. The Magnificent Seven stay stagnant and the other companies push the SPY higher
  3. The Magnificent Seven fall and take the other 493 companies (and the market) with it
  4. The Magnificent Seven stay stagnant and the other 493 companies push the SPY lower. 

There is actually a fifth option of everything remaining the exact same (stocks stay the same price), which is very unlikely given stocks move daily. While nobody has a crystal ball, there have been some signs of what’s to happen next. Since the market’s peak at 565, the Magnificent Seven have started to decline taking the SPY with it (option 3), but it is way too early to determine if we are in a correction or a small pullback. With that said, the Magnificent Seven has some work to do to continue the SPY’s strength. Of course, we have just kicked off earnings season and promised interest rate cuts (major economic event) have yet to happen, and thus last quarter’s company performance and the upcoming Fed’s interest rate decision could not be more critical to the overall market’s well-being.

Conclusion 

This article is the first step in understanding how to trade the SPY/SPX. The SPX is a difficult beast to trade, but if traded correctly can reap the most profits. Further, picking up on the SPX’s movement relative to a Magnificent Seven stock is imperative for consistent trading. This year’s bull run needs to remind you that – yes, a stock can go higher – i.e., stick to your stop loss and always abide by your risk.

Understanding the impact of the Magnificent Seven is crucial for stock market success. You have to understand who drives the market and pushes the SPX. You have to understand which companies have the most impact on the SPX, and how other companies will respond to said companies’ movements (if at all).

Published on July 24, 2024