Bears see Mag 7’s S&P dominance as ‘one bad payroll away from cracking’: Bank of America

The Magnificent 7 tech giants’ significant impact on the S&P 500 (SP500) could stem from a significant slowdown in U.S. economic activity, Bank of America said.

Nasdaq 100 (NDX) and other technology stock indexes (COMP:IND)) (Q Q Q) fell this month as investors moved into small-cap stocks.Rty Way) and other sectors that have been overlooked by the market, which have been spurred by renewed expectations of up to three rate cuts this year and Technical effects. Nasdaq 100 (NDX) fell by about 4% in July.

Market optimists say the “correction” is healthy, but pessimists say the market is “one step away from breaking” the Magnificent 7’s “oligopolistic/monopolistic hold” over the S&P 500 (SP500)(SPY)(VOO), Bank of America investment strategist Michael Hartnett said in a Flow Show note from the firm on Friday. He shared this chart of the Magnificent 7’s highest concentration, +30% over the broad market index:

Hartnett said that pessimists see a sign of recession in the steepening of the US 2-year/10-year (US2Y) (US10Y) yield curve.

More broadly, pessimists see the decline in commodity prices as a sign of the “sickness” of the global economy, as evidenced by the drop in Chinese bond yields to all-time lows, he said. Hartnett had previously said that U.S. bonds were likely to rise in the second half of 2024 amid signs that economic activity could be heading toward contraction.

This week, disappointing financial updates from 7-cap companies Tesla (TSLA) and Alphabet (GOOG) (GOOGL) raised questions about the rally surrounding corporate AI investments that has driven the S&P 500 (SP500) and Nasdaq Composite (COMP:IND) sharply higher this year.

Meanwhile, economists are watching the US labor market slow down. The unemployment rate rose to 4.1% in June, the highest level since November 2021.

The massive selloff in the Mag 7 stocks this month — Amazon (AMZN), Alphabet (GOOG)(GOOGL), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA) — has eroded the Nasdaq-100 (NDX)’s double-digit gains so far this year. But the index is still up +23% over the past year.

Bank of America said market bulls are saying the correction is healthy, noting that credit spreads are “well behaved” and “significant levels” are holding across markets. Among those, the Nasdaq 100 (NDX) has topped 18,700 and London copper prices have topped $9,000 a metric ton.