In the coming weeks, the Magnificent 7 stocks, which had been in charge of the market until this summer, will lose even more of their market authority.
The most recent sign of this change is a list of large-cap stocks that at least two of the best-performing newsletters that my performance-auditing company tracks say you should buy. Out of the seven stocks that were once thought to be “magnificent,” only two make the list: Alphabet, which owns Google (GOOG -1.57% GOOGL -1.33%), and Apple (AAPL 0.04%).
At the moment, at least two of these groups are recommending that you buy 61 different stocks. The other five companies in the “Magnificent 7” are not in this group: Amazon (AMZN) is down 2.34 percent, Meta Platforms is down 0.90 percent, Microsoft is down 1.00 percent, Nvidia is down 3.5 percent, and Tesla is down 2.6 percent.
This column is mostly about large-cap stocks because we’re now in the time of year when large-cap stocks have generally done better than small-cap stocks. The chart below shows how things have been going since 1926 and gives a summary of this past. You can see that, on average, the smallest-cap stocks have done better than the largest-cap stocks in January. As the year goes on, however, their edge decreases. It’s the season’s winds that favor the large caps over the small caps by the fourth quarter.
A study by Lucy Ackert (finance professor at Kennesaw State University) and George Athanassakos (finance professor at the University of Western Ontario) says that there is a good reason to think that this trend will continue. The trend was linked to the pay incentives that institutional money managers work under. Their first study on this pattern came out in 2003, and three years later, they proved that the pattern is still there in another study.
This happens because pay incentives make money managers change their portfolios to look more like the S&P 500 SPX 1.16% as the end of the year near. In other words, they will sell the small-cap stocks that aren’t well reflected in that benchmark and buy the big-cap stocks that are. In January, those factors change back to favor small caps. That’s why January has been the best month for these smaller stocks in terms of average relative return.
It’s important to note that this seasonal change in how well small and big stocks do is not the same as longer-term trends in how their returns compare. As everyone knows, small-cap stocks have lagged behind large-cap stocks by a surprisingly large amount over the last ten years. This has led some experts to predict that the pendulum will swing back in favor of small-cap stocks in the coming years.
Of course, those experts could be right. But if the yearly regular pattern in the performance of small and large stocks stays the same, you might want to wait until the start of the year to bet on the small caps’ comeback.
In the meantime, the table below shows the 10 biggest stocks that at least two of the best groups are currently recommending.
