Two "micro" companies powering this year's small-cap Russell 2000: This week's chart

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We all know about the “Magnificent Seven,” the current group of mega-cap stocks that have broken out of the S&P 500 stock group. The group was then reduced to just four people.

However, the Russell 2000 index of small-cap stocks has its own pair of Magnificent members: Micros.

MicroStrategy (MSTR), the Bitcoin proxy business led by the quotable Michael Saylor, and cloud storage company Super Micro Computer (SMCI), which rides on the AI demand for more computing power, have teamed up to single-handedly lead the index. Responsible for maintaining the year. It goes from bad to worse.

Russell stock is down well over 3% this year, and without the performance of these two stocks, it would be down about 7% as of Thursday, according to DataTrek. As DataTrek co-founder Nicholas Colas said this week, “Russell needs some more meme-y stocks, not fewer, for Russell to start generating better returns.” ”.

Those numbers got even worse on Friday, as Supermicro fell as much as 19% on Friday after announcing its earnings date but not. announce in advance income. It's a bit like being punished for showing up to a party on time but not saying enough hello or thanks to the host.

Index concentration has been a continuing theme in market commentary since the emergence of the Magnificent Seven last year. The influence of the top 10 stocks in the S&P 500 is currently at a new high for the index, surging above historic levels since 2019.

For Russell, this concentration looks even more fragile when you consider the business behind the two “micro” stars.

MicroStrategy has tied itself to the neck of SS Bitcoin, with the company's CEO calling the world's largest cryptocurrency the “crown jewel” of the investment world and saying the company's “ultimate goal is to acquire more Bitcoin.” '', he claims.

The scandalous Super Micro, which I wrote about about two months ago, is essentially an AI-focused offshoot of the Magnificent Seven, building customizable servers for its nascent technology.

As Colas rightly said, there is off-brand AI and crypto memestock energy at work here. However, there is another important caveat for investors. That said, this is how indexes actually work.

The idea is that top-heavy indexes are like towers built on sand, and investors should wait for the other shoe to drop. After all, how healthy can the stock market and economy be if the majority of companies lag the index?

A common refrain on Wall Street this year has been the view that the rally will widen. As Josh Schaefer wrote on Friday, the call has so far been unsuccessful.

However, as explained above, For many years, the point of indexes has been that sometimes one sector (or company) outperforms, and investors who buy the entire basket get the same return.

Additionally, over the history of the S&P 500, a handful of stocks have often accounted for the majority of the profits.

As Ben Snyder, an equity strategist at Goldman Sachs, told us in February, “Emerging companies grow, become more weighted in indexes, and the market rises with them.”

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

ethan wolfman He is a senior editor at Yahoo Finance and runs the newsletter. Follow him on Twitter @ewolffmann.