While investors would have been worse off if not for the Magnificent Seven, we wondered: Has it always been more important to hold the stock market’s top contributors, or have there been times when it was more important to not hold the market’s biggest detractors?2 Now unfolding is a study in market cyclicality.
Market leaders grab headlines; do laggards have more influence on market returns?
To answer this question,we replicated the constituents of the Russell 3000 Index to reflect its changing makeup over the period from January 1, 2000, through December 31, 2023. Then we split the 24 years into 12 two-year subperiods, calculated each stock’s contribution to the index return, and simulated alternative courses of history for the U.S. stock market by excluding entire groups of stocks from both ends of the contribution distribution.3
The bars in the chart that follows show the net effect in each subperiod of excluding both the top contributors and the biggest detractors from the Russell 3000 Index.
A look across all 12 two-year periods reveals an interesting pattern. In the early years of our analysis, it generally was more important to avoid the worst detractors, because they weighed on the market more than the top contributors helped it. In the latter years of our analysis—that is, the Magnificent Seven era—it has been more beneficial to hold the top contributors than to avoid the biggest detractors.
The net impact of not holding the stock market’s top contributors and detractors is a function of how large-caps perform relative to small-caps
