The Strategist

The Magnificent Seven, Six, Five, Four,...

The soaring shares of Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta and Tesla have propelled these tech giants to new heights, accounting for nearly 60% of the S&P 500 index's performance. However, concerns arise among some investors regarding the concentration and rapid growth of these seven companies. Despite their dominance, some cracks are beginning to show.

Data: 6 marzo 2024
Autore: Chris Burger, Senior Equity Analyst LGT
Tempo di lettura: 10 minuto

Die Logos der sieben grössten Unternehmen der digitalen Wirtschaft: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia und Tesla. — © istock/MicroStockHub

In the classic western "The Magnificent Seven", seven cool gunslingers, led by Yul Brynner, Steve McQueen and Charles Bronson, fight for a good cause and help a Mexican village defend itself against a terrorising band of bandits. On the stock market, the nickname is used for the shares of Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta and Tesla. They have earned the superlative as the hype around artificial intelligence has sent the shares of the big US technology companies soaring: The US S&P 500 index rose 26% last year. The shares of the Magnificent Seven more than doubled on average over the same period, accounting for almost 60% of the index's performance. The other 493 stocks in the index accounted for the remaining 40% of performance, indicating a highly concentrated rally and relatively low market breadth. As a result, the market capitalisation of the seven companies rose to over USD 13.4 trillion. This is more than three times the GDP of the world's third largest economy (Japan (2022): USD 4.2 trillion).

Despite concerns, historical comparison does not suggest a bubble

Some investors are now concerned about the rapid growth and high degree of concentration. The share of the Magnificent Seven in the S&P 500 index has risen to 29%. This is one of the highest levels in the index's history. But concentration alone is hardly an indicator of a bubble - some of the leading indices in the UK, Hong Kong, France, Canada, Switzerland and Italy are even higher. The seven stocks also account for 22% of profits and are growing at well above-average rates thanks to their strong market positions and technological leadership. Profits for the Magnificent Seven rose by 56% in the last quarter, while the remaining 493 companies saw profits fall by an average of 2%. The difference is likely to remain significant over the next few years. Sales growth for the Magnificent Seven is forecast to be 12% per year until 2026, four times higher than for the rest of the index. With a price/earnings ratio (P/E) of 28.5x for the next twelve months, the Magnificent Seven are no longer a bargain, but given the growth potential, the valuation does not seem excessive either. Nor does a historical comparison suggest a bubble, given that the P/E of the Nasdaq 100 - the index as a whole, not the seven most expensive stocks - was over 70x during the "dotcom bubble". The Magnificent Seven are much more mature companies with high profitability and higher barriers to entry than many internet companies at the time.

From "Magnificent Seven" to "Fabulous Five"?

That said, the individual stocks in the Magnificent Seven are not immune to potential setbacks. Nor is the composition of the group set in stone, as market dynamics are constantly changing. Regulatory changes, technological breakthroughs, geopolitical events and economic developments may cause some of the current members to lose ground, while others may rise. Historically, stocks have been grouped by a catchy name or acronym. For example, the "Nifty 50" was popular in the 1960s and early 1970s, and the "Four Horsemen" (Cisco, Dell, Intel, Microsoft) caught the attention of investors in the 1990s. A few years ago, the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) were all the rage. What these stocks had in common was a high market capitalisation and strong performance. As soon as the latter was no longer the case, the group dissolved or was adjusted.

Given the weak performance of Tesla and Apple (and more recently Alphabet), there are calls for an adjustment to Wall Street's current favourite clique. Tesla shares are down 18% this year. Pressure is mounting from growing competition in the electric car industry, especially in China, where domestic manufacturers such as BYD, SAIC and Nio are challenging Tesla. In addition, the electric car maker reported a further drop in profits in January and its outlook also disappointed investors. Concerns about falling sales in China are also growing at Apple, which has seen its share price fall by 7% this year. The divergence between the stronger and weaker stocks in the group is therefore widening. Unless Tesla and Apple rebound soon, the Magnificent Seven could soon become the "Fabulous Five". Another option would be to replace Tesla and Apple with European technology groups ASML and SAP: they too have performed extremely well in recent months in the shadow of the original Magnificent Seven. After all, the Western classic of the same name was remade many years later with Denzel Washington, Chris Pratt and Ethan Hawke.

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