A 'Magnificent' Bear Market

The Magnificent Seven dropped into a bear market yesterday...

We've talked a lot about market concentration over the past few months. In short, just a handful of stocks account for a disproportionate weighting of today's market.

The Magnificent Seven stocks – Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA) – have recently made up about 30% of the benchmark S&P 500 Index. Our colleague Dan Ferris compares today's environment with the "Nifty Fifty" bubble of the 1960s and 1970s.

And now, we're getting a lesson in the downsides of having all your eggs in one small basket...

Yesterday, the "Mag 7" stocks sold off enough to enter what's widely considered a bear market.

The Bloomberg Magnificent 7 Price Return Index tracks these seven stocks on an equal-weight basis. It gives a good idea of how these stocks are faring.

After yesterday's drawdown, the Mag Seven were down 20.3% from the index's most recent all-time high on December 17, 2024. Take a look at this chart that Charles Schwab Senior Investment Strategist Kevin Gordon shared on social platform X yesterday...

The red portions illustrate drawdowns from previous highs in the Mag 7 Index.

The most recent trend started in December, but we've seen a quick and drastic drop in these stocks over the past few weeks. And the trend marks the largest decline since the start of 2023 (surpassing the 18% drawdown in the third quarter of 2024).

For comparison, the Invesco S&P 500 Equal Weight Fund is down less than 2% since December 19, though it fell about 7% before that from its all-time high on November 29.

With the Mag 7 making up an incredibly large part of major stock indexes (in addition to nearly a third of the market-cap-weighted S&P 500 and 42% of the Nasdaq 100 Index), the broader markets have also fallen over the past few weeks. And investor fear has risen.

There is a lesson here...

During good times like we saw in 2023 and 2024, concentration in high-flying names can be a great thing for stocks. As we wrote in a January issue of the Digest...

Essentially, it means these companies have an outsized impact on how the overall markets move. They're a big reason why the S&P 500 has risen 22% over the past 12 months, while the equal-weighted S&P 500 has "only" gained 10%.

In that very same Digest, we warned that the good times can't continue forever. We said the Magnificent Seven stocks might roll over and drag the broader market lower – like we saw with Denmark and Novo Nordisk (NVO), which at one point made up more than half of the country's major stock index.

More from that Digest...

Since September, though, Novo Nordisk's shares have fallen close to 40%. That pulled the entire index down about 14%. That has stopped the bull market in the OMX Copenhagen 25.

This could very well be what we see happen in the U.S. if the "Magnificent Seven" stocks lose enough steam.

That's exactly what we've seen over the past couple of weeks. A major selloff in a handful of stocks has pulled tech stocks into a correction (as measured by the Nasdaq) and the broader market to the cusp of a correction (as measured by the S&P 500).

The tariff war just happened to be the trigger...

Today, President Donald Trump announced an additional 25% tariff on Canadian steel and aluminum imports, bringing the total tariffs to 50%, effective tomorrow.

Trump wrote on social media that the move is in response to the province of Ontario slapping a 25% tax on electricity exports to the U.S.

Not to be outdone, Ontario Premier Doug Ford went on CNBC today and said he would be willing to shut electricity off to the U.S. entirely if Trump "continues to hurt Canadian families." Nobody wins, certainly in the short term, in a tariff war.

Then, after the market closed, U.S. Secretary of Commerce Howard Lutnick said all those ideas were suspended after he spoke directly with Ford.

The S&P 500 was down intraday by more than 1% on the news. As we said above, it's flirting with its own formal "correction" of a 10% slide from its all-time high on February 19. Things turned higher in the midafternoon on positive news about another war. Ukraine is reportedly showing a willingness to agree to ceasefire deal with Russia. But the S&P 500 still finished 0.8% lower for the day.

In related 'Mag 7' news, kudos to Dan...

On Friday, Dan and Extreme Value analyst Mike Barrett sent their subscribers a new bearish recommendation on Tesla.

Without giving too much away, it's partially tied to the negative sentiment that has been building toward Tesla CEO Elon Musk. Since Inauguration Day, Musk has started taking a "chainsaw" approach to federal workers and programs with his Department of Government Efficiency ("DOGE") side project, seemingly imitating Argentine President Javier Milei.

The move has led to things like protests outside Tesla dealerships over the past week. And Tesla shares are down about 45% since Inauguration Day.

Sentiment can turn quickly, shared many longer-term fundamental reasons for why he's willing to bet against Tesla right now.

They include "the $2 trillion global boondoggle" of government investment in new clean-energy initiatives over the past five years fizzling out and a mass exodus of electric-vehicle ("EV") production from many American carmakers.

Shortly after he was inaugurated, Trump even issued an executive order titled "Unleashing American Energy" that states U.S. policy is to "eliminate the 'electric vehicle mandate'" and ensure "a level regulatory playing field for consumer choice in vehicles" by eliminating things like government subsidies that favor EVs.

Maybe most importantly, though, is that many people have a serious misperception about how Tesla makes (or loses) money. That, combined with Tesla's high market valuation and failure to continue delivering hypergrowth, spells trouble. Putting it all together, Dan said...

Yes, the stock has been one of the best-performing names of the past several years. After all, it's one of the so-called Magnificent Seven stocks that – as a group – have led the S&P 500 Index to historic valuations. But its meteoric rise is due almost entirely to hype. The company grew revenue by less than 1% last year... yet its stock is still priced at an absurdly high valuation. As the EV market cools, that valuation is sure to fall.

On top of that, DOGE has become a new problem for Tesla "at a time when it can't afford any more problems," Dan wrote. And "since Musk appears likely to continue steering DOGE until its scheduled dissolution on July 4, 2026, there's plenty of time for him to do even more damage."

It remains to be seen how long or how much Musk will stick around Washington, D.C. There are financial interests at play, of course, with Tesla trading lower every week since Musk became so active in the Trump administration. It has lost hundreds of billions of dollars in market cap.

Personalities and power struggles are at play, too...

Last Thursday, Trump told reporters in the Oval Office that various government department heads are in charge (not Musk) and will make staffing (firing) decisions. Musk will serve as an adviser. Trump said...

I want the Cabinet members to keep good people. I don't want to see a big cut where a lot of good people are cut... Elon has been really teaching everybody about the numbers that you could do, but... I also want to keep the good people. We want to get rid of the people that aren't working, that aren't showing up...

A few weeks ago, Musk also threw cold water on the idea of the Stargate project to build AI infrastructure that Trump announced with OpenAI, questioning the funding of one of the investors, SoftBank.

All doesn't seem lost, though. Overnight, Trump vowed to buy a Tesla at full market price in a show of confidence for Musk. Three Teslas showed up at the White House this afternoon, and Trump and Musk held a joint media appearance...

"This is a different panel," Trump said of the dashboard of one of the cars as he sat in it. "Everything's computer." Of Musk, Trump said, "He's a great patriot. You should cherish him."

When Musk was asked how long he'll work directly with the White House, he said as long as he is useful and productive, but he didn't seem enthusiastic in his response.

In any case, whether you think DOGE is a worthwhile endeavor or not (and we have some criticisms about how Musk has gone about things), when it comes to Tesla and its share price, "Musk's DOGE side project isn't just a distraction," it's a liability."

 That's one way to profit from a "magnificent" bear market.

Another is to simply understand that a decline in the popular names of the past two years and a seemingly endless stream of anxiety-provoking headlines can overshadow solid performances in the market elsewhere... and potential buying opportunities.

Gold and bitcoin were up today...

The "chaos hedge" of gold keeps on trading near all-time highs, above $2,900 per ounce as we write today. Outperforming when "fear" grips the market is a big reason why we always recommend owning at least some gold in a diversified portfolio.

Elsewhere, bitcoin had fallen almost 30% since trading at an all-time high of close to $110,000 on January 20. But for the first time in a while, it diverged from a sell-off in the broader market today. The world's most popular crypto is up about 4% in the past 24 hours to just above $82,000.

A bull might argue that bitcoin may have "peaked" first as this market correction developed... and that several other fundamental indicators suggest the crypto hasn't hit one of its four-year-cycle tops quite yet.

Meanwhile, a bear might say bitcoin is trading, as of this writing, just below its longer-term, 200-day moving average and whatever lift cryptos got from Trump's election looks like "buy the rumor, sell the news" behavior. We'll have to monitor the action in bitcoin over the next few weeks before starting to reach a conclusion.

One other thing: High-quality insurance stocks – a favorite of ours at Stansberry Research – are doing just fine, many of them trading higher over the past two months. And I'm probably neglecting to mention other stocks in our publications.

What to watch...

First, we'll get our first look at the newest inflation report tomorrow morning when the February consumer price index ("CPI") report comes out before the market opens.

The market's prevailing expectation is for continued disinflation, which would suggest that the Federal Reserve could have the option to possibly cut interest rates sooner rather than later. "Fed watching" has taken a back seat in the market lately, but it'll be front and center again soon.