It only took 20 days for the S&P 500 to fall into correction. It was the fifth-fastest correction over the past 75 years.

The index has slipped as much as 10% from the February 19 peak. That means the S&P is now back at levels seen in September.

That’s seven months of gains wiped out in 20 days. It erases $5.5 trillion of market capitalization from the high.

And one group of stocks stands out more than any other amid the decline.

The Magnificent 7 is made up of Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA).

Riding the artificial intelligence (AI) boom, the Mag 7 helped propel back-to-back 20%+ gains for the S&P 500 in 2023 and 2024. That has made investing seem almost easy for the past two years.

But the recent drop shows the dangers of complacency.

Now the Mag 7 could now usher in a new era of volatility. Here’s why…

Priced for Perfection

Coming off of 2022’s bear market, the Mag 7 drove a huge share of the S&P 500’s gains.

The group made up 63% of the S&P’s 24% return in 2023. It was just over half of the S&P’s 23% return in 2024.

The gains also pushed the Mag 7 to a record weight in the S&P 500.

At one point to start this year, those seven stocks accounted for 33% of the index.

Early on, their surging value appeared justified. The group led the earnings recovery coming out of 2022’s bear market.

But I had this to say in in the middle of last month, just six days before the S&P 500 made its high for the year so far:

For the Mag 7 to justify its weight in the S&P 500, it needs to keep delivering on growth expectations…

And since these stocks currently make up a record share of the S&P 500, that has broader implications for the market.

Questions about their growth prospects and financial outlook could cause shares to come crashing down.

Since then, trade wars and recession fears have sent the Mag 7 down 15% in less than a month.

The group is now down 20% from the peak in mid-December.

Just as the Mag 7 can fuel bull market gains, it can drag the major indexes lower too.

And if history is any guide, we’re in for a bumpy ride ahead. Here’s what to watch next for the Mag 7…

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Expect More Volatility Ahead

Despite the pain seen in the Mag 7 from the December peak, there could be more downside in store.

A study by Goldman Sachs showed that high levels of market concentration are associated with greater market volatility and lower expected returns.

As one example of a potential path forward, we can look back to the last big bubble in technology shares.

A small group of tech stocks comprised a large portion of the major indexes during the internet bubble. It culminated when the bubble burst in early 2000. Take a look at the Nasdaq Composite from 2000 through 2003:

From the arrow marking the peak to the arrow marking the bottom, the Nasdaq lost over 75% from 2000 through late 2002.

Now we may be in the early stages of a similar bubble unwind.

Even with the pullback in Mag 7 stocks, they still account for 30% of the S&P 500. That’s more than the top seven stocks during the internet bubble peak.

Many insist that the circumstances we’re in now are different than the dot-com boom. They say that the hype behind the AI trend has strong underlying fundamentals… not just irrational speculation.

And maybe that has some truth to it. But the ballooning spend into AI stocks in the past couple of years is beginning to raise questions about whether that capital will eventually turn into future profits.

And so far, the Mag 7 are responsible for over half of the S&P 500’s drawdown this year.

That very debate – whether the AI boom can continue – is enough to ensure there’s still plenty of volatility ahead.

Yet keep in mind that we will see sharp declines and rallies. Look at the chart again:

Despite the overall peak-to-trough decline of 75%+, there were four rallies of 25% or more along the way for the Nasdaq during the dot-com crash.

That’s why I call volatile periods like these a “trader’s paradise.” When you know how to take advantage of these reversals back and forth, you can earn major profits.

That’s how my One Ticker Trader members have managed to bring home 11 winning trades in a row so far this year. We’ve averaged 34.3% on those trades. And we plan to have an active year ahead of us.

So just keep in mind… Buy and hold may have worked well over the past couple of years.

A new approach will be needed to profit from the volatility that lies ahead… And if you’d like to follow along with my trades, you can find out more right here.

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict