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Much ink has been spilled discussing the impact of the ‘Magnificent Seven’ (namely Amazon, Alphabet, Apple, Microsoft, Meta, Nvidia, and Tesla) on global equity markets. These seven stocks collectively account for about 30% of the S&P 500 Index. This is an historically high level of concentration and has roughly doubled over the past five years; Tesla was only added to the S&P 500 in late 2020 and is slightly over 2% of the index now. The degree of concentration, plus the relative performance and valuations of the cohort, has prompted some commentators to suggest they are in a financial bubble, where rapidly rising asset prices are disconnected from intrinsic value. While not opining on the outlooks for the individual stocks or the group, we think the evidence suggests otherwise.
The chart below shows that the relative performance of the ‘Magnificent Seven’ has been driven by their superior earnings per share growth. After an extended period of outperformance, the valuation of the ‘Magnificent Seven’ compared to the S&P 500 Equal Weight Index is currently at the low end of the range of the last decade, at roughly twice the price-to-earnings multiple (based on next 12-months earnings forecasts). Of course, the entire US equity market could be in a bubble, but current valuations are within the normal range of historic market multiples.
