The market has found a way to shake off its dependence on big tech. Will it continue?
In 2025, the Magnificent 7 trail ‘the S&P 493’. And it raises a key decision with regards to selective and passive investing.
Over recent years, investors could be forgiven for thinking there has been broad-based strength across the market as record highs tumbled. After all, a rising tide is said to lift all boats.
But a closer look at the data behind the multi-year bull market - especially during the pandemic era - paints a slightly different picture.
And it is a picture where it quickly becomes apparent that being invested in the ‘wrong’ stocks could have cost you dearly, even if you did see positive returns.
You see, recent years have been defined by narrow leadership when it comes to market breadth.
In other words, the market’s performance has often been supported by a relatively small cohort of companies. And as it so happens, this group is the Magnificent 7.
A changing of the guard?
This year, things have been playing out slightly differently.
In fact, for the first time in years, the performance data is siding with the rest of the market’s constituents, and it raises questions as to where investors are best placed to direct their capital.
This year, there has been a particularly large divergence in the performance of the so-called Magnificent 7, and the rest of the S&P 500.
The Magnificent 7 - comprising Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA), Alphabet (GOOGL), Amazon (AMZN), Meta (META), Tesla (TSLA) - have actually weighed down the market.
There are indices that corroborate this, with the CNBC Magnificent 7 Index trading 3.0% lower since the start of the year through to the end of May. An alternative benchmark, the Indxx Magnificent 7 Index, was 2.9% lower across the same timeframe.
By way of comparison, the full S&P 500 benchmark was 0.7% higher year-to-date as at May 30.
Now that may seem like a small difference, but let’s not forget, the broader S&P 500 return includes the negative returns among the Magnificent 7. Therefore, underlying returns for the remaining cohort, ‘the S&P 493’, were even higher.
At the worst of the market correction in April, the gap between these two cohorts was even larger, in the vicinity of a 15 percentage point differential.
With this, there is a message that bucks the trend of recent years. The market has found a way to continue its ascent, even in the face of difficulties for Big Tech.
So far, it is the likes of the Industrials, Communication Services, Utilities, and Financials sectors that have supported the rally. At the time of writing, the tech sector was seventh out of eleven sectors for performance in 2025.
If there is a view that the market has made a transition to a period with less dependence on the Magnificent 7, and a more balanced contribution from other sectors, diversification becomes a relevant theme.
Headaches for Big Tech
The headwinds for tech have grown more apparent since the US unveiled trade tariffs. Apple, Amazon, and even Nvidia were impacted severely by this news, albeit the latter has reversed course over recent weeks.
A backdown in tariffs levied at China has provided the impetus for the performance differential between the Magnificent 7 and the S&P 493 to close, which draws an interesting parallel.
If, as we believe, the Magnificent 7 cohort might revert to its position as a market leader, as recent history would suggest, then there may be buying opportunities in some of the names still under water in 2025.
At the time of writing, just three of the Magnificent 7 were in the green this year. That included Meta Platforms, Microsoft, and Nvidia.
When it comes to Nvidia, its market cap, now sitting around US$3.5 trillion, is going toe-to-toe with Microsoft for the mantle of the most valuable company in the US.
As the ‘darling’ for the artificial intelligence (AI) sector, this also tells us that investors haven’t moved on from this trade at all, even if the momentum has wavered at times.
Operationally, Nvidia’s momentum certainly hasn’t slowed, with high-profile AI chip sales to the likes of Saudi Arabia, and recent results showing quarterly revenue surging 70% even in the face of China curbs.
But we also know that there will be winners and losers as part of the AI trade, and lofty growth valuations are also those most susceptible during sell-offs, so the importance of staying diversified remains critical.
Small caps - a contrarian opportunity?
Meanwhile, at the other end of the scale, small-caps are also lagging. The Russell 2000 continues to underperform the market by a wide margin, and at May 30, it was down 7.4% year-to-date.
But investors should again consider the implications of this divergence. Are there opportunities at hand via selective investing?
With interest rates on track to fall later this year, or early next year, the small cap sector could be poised for a rebound, especially domestic cyclicals that stand to benefit from a low rate environment.
If this cohort experiences mean reversion, then there is a good chance to revisit long-term value.
Selective investing and passive indexing
Each of these trends provide a point of consideration for investors to make key decisions with regards to selective investing or passive indexing.
With the market having undergone a correction in recent times, where valuations were recalibrated across the board, this dilemma becomes even more noteworthy.
Selective investing offers investors an opportunity to target stocks with more precision, thereby deploying capital in opportunities where it is perceived there may be greater upside.
The flipside to this, of course, is that it is a higher risk proposition, as putting too many eggs in one basket can obviously work against an investor.
But over the long-term, and given the quality of the businesses associated with the Magnificent 7, it is our view there is likely to be great upside in selective investment among some, if not most of these companies.
Similarly, the Russell 2000 may also present select opportunities among stocks where valuations were most impacted, and have yet to fully recover.
The above doesn’t mean passive indexing has no place in a portfolio. But rather than following an index, there is merit to a strategy based on selective investing in core positions, while also acquiring positions in stocks from the broader market that aid diversification purposes insofar as sector and industry.
Portfolios Review: May 2025
Last month saw global equities continue their recent surge, with risk-off sentiment largely conducive to gains across the board.
We also saw the Reserve Bank of Australia pass its second interest rate cut this year, which was well received by the local market.
The door is open to further rate cuts over the coming months, especially with signs of the local economy crawling along, but for the time being it seems the US market and broader policy out of the world’s largest economy will have the greatest say over proceedings.
Overall, Portfolio returns held up well last month, especially for our Growth and High Growth Portfolios, which beat the market, albeit asset weightings held back the Conservative Portfolio.
US shares play a central role driving monthly returns
The most prominent source of gains for each of our Portfolios was our exposure to international shares, which enjoyed a bumper month through May.
Our holdings in the iShares S&P 500 AUD ETF (IVV) and Betashares Nasdaq 100 ETF (NDQ) served us particularly well.
The pair were also supported by the hedged iteration of the aforementioned Nasdaq fund, the Betashares Nasdaq 100 Currency Hedged ETF (HNDQ), as well as the unhedged and hedged versions of the VanEck MSCI International Quality ETF (QUAL and QHAL).
International shares represent one of the key pillars of our investment strategy, and it’s easy to see why based on performances like that witnessed last month, where significant returns can be achieved.
On the basis of such results, some investors may wonder why we otherwise can’t direct all capital into this asset class, especially given its track record over recent years.
However, that would overlook the importance of diversification, and the roles that different assets may play within a portfolio.
While most investors consider diversification in relation to the number of stocks one might hold at any given time, it also spans to other forms, including diversification by geographic region and by economy.
The benefit of this is that you may capture exposure to different industries and trends that prevail in one market, or where policy is supportive of equities.
On the flip side of that, yes, investors also need to be mindful about the risks that come with international shares, including those relating to local legislation, socioeconomic factors, and currency, to name but a few.
Nonetheless, we hold a large allocation of international shares in each of our Portfolios, and of course, this level of exposure is greater across our more growth-oriented Portfolios, where investors accept greater volatility.
This point also needs due consideration, since the presence of high growth shares not only has the potential to deliver a tailwind in months like we saw in May, but it can also lead to pronounced losses when market volatility rears its head.
Fortunately, last month saw great support and encouragement for growth stocks, particularly those in the tech sector, where the strongest leads came from.
In our view, the current outlook for US markets also looks as good as any other time this year, even though there is still some uncertainty with regards to trade tariffs.
And the reason we say that is because we now better understand how policy is effectively being used as a negotiating tool, rather than a direct initiative to impede the market.
We also saw the government loosen its stance once uncertainty got the better of investors’ nerves, so there is some confidence the government remains prepared to backstop the market where necessary.
And perhaps most importantly, US inflation has continued to ease, even in the face of tariffs. For now, the Federal Reserve may be playing it cool and cautious, but the case for further interest rate cuts is certainly growing.
Australia’s major banks deliver mixed reports, but CBA underpins ASX gain
Our Portfolios also benefitted from a robust showing across the ASX last month, largely influenced by the results of the major banks, and some enthusiasm for growth stocks.
Of particular interest were the major reports among the Big Four, which offered a somewhat contrasting picture. Generally speaking, the results brought attention to the resilience of the sector, as well as some of the emerging challenges.
Commonwealth Bank (CBA) was the clear standout, reporting a notable increase in cash profits. This was driven by robust growth in business lending, while it also managed to keep net interest margins stable. CBA did acknowledge rising loan arrears, and increased impairment expenses, but by month’s end, its share price set a new all-time high.
In the case of Westpac (WBC), it announced a slight decline in net profit, largely owing to elevated operating costs and competitive pressures in the lending market. But it also saw strong growth in business loans and deposits.
The story for NAB (NAB) and ANZ (ANZ) was different, with each facing margin pressure due to intense competition in the mortgage sector. Both banks reported declines in net profits, reflecting the challenging operating environment.
Clearly the sector is starting to grapple with increased operating expenses. And although credit growth has held up well so far, it has come at the expense of narrowing margins. But with the RBA now cutting rates, this should ease borrowing costs, and may stimulate lending growth.
The above results, as well as a positive backdrop for the market helped ensure holdings like the Betashares Australia 200 ETF (A200) and the Betashares Australian Quality ETF (AQLT) made strong contributions to our Portfolios last month.
Hybrids, bonds hold back returns
Although growth assets helped drive our returns last month, overall returns across the Portfolios were partly held back by our more defensive assets, namely cash, hybrids, and bonds.
This was most evident in the Conservative Portfolio, where cash, courtesy of the Betashares Australian High Interest Cash ETF (AAA), and the inclusion of the Betashares US Treasury Bond 20+ Year Currency Hedged ETF (GGOV) tied up capital that would have delivered superior returns elsewhere.
But this also shouldn’t come as a surprise to investors, as the Conservative Portfolio has a specific mandate to target more stable assets, with priorities placed on income generation and capital preservation.
Beyond this, the different weightings attributed to various asset classes should align with investors goals and risk tolerance.
Each Portfolio was also impacted by exposure to hybrids, where we booked a monthly net loss across this asset class, mostly on the back of sharp declines for our holdings in Macquarie bank hybrids.
Regardless, as we mentioned earlier, diversification will continue to play a key role in the make-up of our Portfolios, facilitating sustainable returns across the long-term.
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