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The two ‘micro’ companies powering this year’s small-cap Russell 2000: Chart of the Week

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We all know the “Magnificent Seven,” the current group of mega-caps that broke away from the S&P 500 stock pack. A group that has since shrunk to just four.

But the small-cap Russell 2000 index has its own pair of Magnificent members: “The Micros.”

Together, MicroStrategy (MSTR), the bitcoin proxy play led by the endlessly quotable Michael Saylor, and Super Micro Computer (SMCI), a cloud storage company responding to AI’s demand for more computing power, are responsible for single-handedly keeping up with the year of the index. going from bad to worse.

The Russell is down more than 3% this year, and without the performance of these two stocks, it would have fallen about 7% as of Thursday, according to DataTrek. As DataTrek co-founder Nicholas Colas put it this week, “The Russell needs a few more meme-y stocks, no fewer, if it’s going to generate better returns.”

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These numbers were even worse on Friday, as Super Micro fell as much as 19% after the company announced its earnings date but didn’t. announce in advance income. A bit like being punished for showing up to a party on time, but not greeting and thanking the hosts enough.

Index concentration has been an ongoing theme in market commentary since the Magnificent Seven was released last year. The influence of the S&P 500’s top 10 stocks has now reached new highs on the index and has risen above historical norms since 2019.

For Russell, this concentration seems even more fragile when you look at the company behind the two ‘micro’ stars.

MicroStrategy has chained itself to the bow of the SS Bitcoin, with its CEO calling the world’s largest cryptocurrency the “apex property” of the investment world and claiming that the company’s “end game is to acquire more bitcoin.”

The scandal-prone Super Micro, which I wrote about two months ago, is essentially an offshoot of the Magnificent Seven’s AI focus, which builds customizable servers for the emerging technology.

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As Colas rightly said, there is some meme stock energy at work here with artificial AI and crypto. But there’s another important reminder for investors: This is actually how indexes are supposed to work.

A top-heavy index, the idea goes, is a tower built on sand, and investors should wait for the other shoe to drop. After all, how healthy can a stock market and economy be if the vast majority of companies lag behind the index?

At the start of the year, one of Wall Street’s favorite calls was expectations of earnings widening. As Josh Schafer wrote on Friday, this call has been a failure so far.

But as we discussed For years, the point of an index has been that sometimes one sector – or even a company – performs better, and investors who buy the whole basket benefit equally.

Furthermore, throughout the history of the S&P 500, just a handful of stocks have often been responsible for the bulk of the gains.

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As Goldman Sachs equity strategist Ben Snider told us in February, “New companies grow and gain weight in the index, and they drag the market up with them.”

Or, in the case of the Russell 2000, they get promoted to the big leagues.

Ethan Wolff-Mann is a Senior Editor at Yahoo Finance and provides newsletters. Follow him on Twitter @ewolffmann.

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