Expert perspective

The Magnificent Seven: A study in market cyclicality

July 09, 2024

For each of 12 two-year periods from 2000 through 2023, a bar chart shows the net gain or loss from excluding—from a hypothetical portfolio—the 10 largest contributors to and detractors from the stock market’s overall return. From 2000 through 2013, the gain from excluding the 10 biggest detractors tended to exceed the opportunity cost of excluding the 10 biggest contributors. The performance edge averaged perhaps 1%–2%. But the pattern changed starting in 2014–2015. In that period and each subsequent one through 2022–2023, the opportunity cost of excluding the 10 biggest contributors outweighed the gain of excluding the 10 biggest detractors. The performance shortfall averaged perhaps 1%–2% and reached about –5% in 2020–2021. The chart also shows the performance difference between large- and small-capitalization U.S. stocks. Small-caps performed better in six of the first seven periods and in seven of the first nine periods, by amounts ranging from roughly 2 percentage points to about 16 percentage points. Since 2018–2019, large-caps have topped small-caps in each period—by roughly 5 percentage points per period, on average.


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