Select Page

U.S. stock gains measured by the S&P 500 index have pulled ahead of cash-like government bonds on a total return basis since the end of 2021, after a jump in so-called Big Tech equities known as the “Magnificent Seven,” according to research from Deutsche Bank.

That time “encapsulates the entire period” of higher interest rates and yields resulting from the Federal Reserve’s monetary tightening, Jim Reid, head of global economics and thematic research, said in a note emailed Monday. 

The S&P 500, a widely-followed gauge of large-cap stocks in the U.S., has rebounded from its losses suffered in 2022 as the Fed was battling high inflation with aggressive rate hikes. The index is benefiting from large gains this year from several megacap stocks in the Magnificent Seven, even as U.S. small-cap stocks measured by the Russell 2000 are struggling.

After a 5.45% climb in the Magnificent Seven on Friday — “the biggest gain in exactly a year” — the S&P 500 “finally overtook” an index of one-month to three-month Treasury bills on a total return basis from the start of 2022, Reid said. “The start of 2022 marked the point where yields started to surge higher.”


The Fed began hiking its benchmark rate in March 2022 to combat surging inflation, resulting in losses in both stocks and bonds that year as Treasury yields jumped. The rise in yields on ultra-short-term Treasurys, or T-bills, attracted investors as a haven amid the market volatility. 

But investors are now expecting the Fed will begin cutting rates this year, as inflation has eased significantly from its June 2022 peak. 

Read: ETF investors fled cash-like bonds in January, favoring these areas of stocks and fixed income

“When you consider that the long-run real return for the S&P 500 is around 6% per annum, and that inflation has been a cumulative 10% over that 2-year period, you could argue that the S&P 500 should now be over 20% higher just to have tracked normal long-term trends,” said Reid

“With all the euphoria of late, it’s hard to remember that the Mag Seven stocks almost halved in 2022 before the incredible bounce since,” he said.

The group of seven megacap stocks includes Apple Inc.
Microsoft Corp.
Google parent Alphabet Inc.
+0.80%, Inc.
Nvidia Corp.
Facebook parent Meta Platforms Inc.
and Tesla Inc.
— all of which saw big gains in 2023. So far this year, all but Tesla and Apple are in the green, with Nvidia and Meta standing out with their skyrocketing returns to start 2024.

Collectively, the seven stocks have an outsized weighting in the S&P 500 index, which finished at a fresh record high on Friday. 

“Ultimately, economic growth should overpower everything in the end for equities,” said Reid.

“But Friday showed the perfect scenario of decent growth plus aggressive rate cuts looks less likely,” he said. “The small caps will take notice but the Magnificent Seven will march to its own beat and take the overall index with it.”

U.S. stocks were trading down around midday on Monday, with the S&P 500
falling 0.5% while the Dow Jones Industrial Average
dropped 0.9% and the technology-heavy Nasdaq Composite
shed 0.5%, according to FactSet data, at last check. So far this year, the price of the S&P 500 index has risen more than 3% based on midday trading levels.

As for small-cap stocks, the Russell 2000
was down a sharp 1.7% in midday trading Monday, bringing its year-to-date drop to almost 5%. 

In the bond market, the yield on the three-month T-bill
was at 5.37% around midday, while the 10-Treasury yield
was trading 13 basis points higher at around 4.16%, FactSet data show, at last check.

Share it on social networks