The Garrulous Jay – Tracking The Magnificent Seven

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At close of business yesterday Apple had a market capitalisation of $2.74 trillion, exactly the same as the market capitalisation of the FSTE All-Share. In other words, the 576 largest companies traded on the LSE are worth the same as the single largest company listed on NASDAQ.

Broadening this out, the so-called Magnificent Seven US-listed stocks – comprising Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta Platforms – have a market capitalisation of approximately $11 trillion, meaning these companies constitute about 30% of the total value of the S&P500 index of the 500 largest US-listed stocks.

Why does this matter?

For investors I think there are at least three reasons it is important to be aware of the dominance of the Magnificent Seven.

First, their size means that they can paint a highly distorted picture of the performance of the indices of which they are members.

Nowhere is this better illustrated than the S&P500. So far this year the S&P500 index is up 12%. By comparison, the simple average share price increase of the Magnificent Seven is approximately 88%, lead by chipmaker Nvidia which has gained 186% (Source: FE Analytics). This means that without the Magnificent Seven the performance of the S&P500 would actually have been negative.

This in turn has two consequences for investors. First it may give a potentially false impression of the performance of the US stock market as a whole.

Secondly, investors putting money into S&P500 index-tracking funds are taking a 30% bet on seven technology companies. And what goes for the S&P500 trackers also applies to a lesser extent to any other tracker fund that includes the US equity market.

The second related issue with the dominance of the Magnificent Seven is it masks both the opportunities as well as the threats that may exist in the US stock market.

From a valuation perspective, the S&P500 including the Magnificent Seven trades at around 19x, whereas without them it trades at 17x (Source: LSEG Datastream).

By making the US stock market look more ‘expensive’ the Magnificent Seven may make it look unattractive. Once one strips out these companies the US market as a whole may become a far more compelling proposition. But even here, one needs to guard against the implicit assumption that the size and valuation multiples of the Magnificent Seven make them unattractive. That’s not the point.

Thirdly, if ever there were a time for active investment managers to show their value, it would appear now might be that time.

Active managers can assess individual stocks and decide what weighting they should have in their portfolios. That’s not to say they should ignore the likes of Nvidia and Apple, but they should not necessarily allow them to dominate their funds.

These managers are also able to consider the merits of the other companies whose business prospects are fundamentally attractive and whose share price performance has perhaps been depressed by near-term macroeconomic factors, or simply just the wall of tracker money chasing the Magnificent Seven.