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Schwab Chief Investment Strategist Liz Ann Sonders

Portfolio > Investment VIPs

Clients Don't Need Big Magificent 7 Holdings: Schwab's Sonders

By Dinah Wisenberg Brin

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Retail investors don’t need the same stock concentration as major indexes to perform well and should avoid trying to match them, Liz Ann Sonders suggested this week.

“You want to make sure you don’t have similar concentration to what exists in the index, … you don’t need to to perform well,” Sonders, chief investment strategist at Charles Schwab, said Thursday on CNBC’s “Closing Bell.”

“One of the biggest misperceptions out there is that for the individual investor the only way for them to perform well is to be in those mega-cap names,” she said.

“That may be more of an institutional problem,” for someone running a fund benchmarked to a cap-weighted index, said Sonders. “It’s not the case for individual investors.”

She cited “a lot of opportunities” in S&P 500 and Nasdaq equities besides the Magnificent 7 mega-cap tech stocks, noting that among the S&P’s top 10 performing stocks year to date, only one is in the Magnificent 7.

For investors looking to take advantage of market opportunities, Schwab recommends staying up in quality — companies with good profitability, return on equity and cash flow — she said.

“That’s how we’ve been telling investors to navigate this unique market,” said Sonders, who noted there are other times when investing in lower-quality companies makes sense.

While investors may see a bull market on the index level, said Sonders, “there’s been a lot of weakness and churn and rotation under the surface, it’s just masked by the cap-weighted index returns.

“So we’ve had bear market-level declines and that, in turn, I think was the setup for some of the broadening out that we’ve seen and the fact that there was money that wanted to take advantage of some of that weakness under the surface. So there’s a lot more to this story than just what you see at the index level,” she said.

She noted in a chart posted on X, formerly Twitter, on Thursday that the average S&P member stock has seen an 18% drawdown from the index’s year-to-date high, while the average Nasdaq stock experienced a 44% drawdown from the index’s year-to-date high.

Sonders detailed in another chart that only 15% of the S&P 500 stocks outperformed the index over the past year, while 57% outperformed in the past month.

“I think this broadening out has legs,” she said on CNBC. There’s a little “exhaustion” with the mega-cap tech trade, and more action down the market cap spectrum, Sonders noted.

Pictured: Liz Ann Sonders

Dinah Wisenberg Brin

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