By Raheel Siddiqui
These tech heavyweights delivered impressively in 2023. But the good news, in our view, looks priced in.
Envy of the rest of the S&P 500, the “Magnificent Seven” – including Apple (AAPL), Alphabet (GOOG) (GOOGL), Amazon (AMZN), Meta (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA) – have had an extraordinary run.
But we fear the tide could turn in 2024 as less optimistically priced names find favor with investors.
Even in a challenging growth environment, these heavyweights delivered impressively last year: Their net income grew 34% versus 1% for the other 493 stocks in the S&P 500, while their collective P/E multiple expanded 30% compared to 9% for all the rest.1
As a group, the Mag 7 generated a 75% return for the year versus 25% for the S&P 500; without them, the broader index would have risen just 12%.2
The Mag 7’s influence spans borders, too. The relative weight of U.S. equities in the MSCI ACWI index has risen to an all-time high of 1.7 from just 0.8 in 2013. Less appreciated, perhaps, is that fully half of this shift is due to the rise of the Mag 7!3
For all their achievements, however, we fear the Mag 7 could face headwinds in the coming year.
First, valuations appear precarious to us. This group – now representing more than a quarter of the S&P 500 – is roughly 40% more expensive even after adjusting for their higher returns on equity versus the rest of the index.4
Such levels could make the Mag 7 potentially vulnerable to even minor hiccups, especially considering they are already pricing in 33% annual earnings growth through 2025.
Second, these giants may prove more cyclical than anticipated. While their earnings beta to nominal GDP has been 30% lower than the rest of the S&P 500 over the last three years, their price beta of 1.4 was 50% higher than the rest of the S&P 500.5
Third, we believe the Mag 7’s price returns are highly correlated to each other6 meaning that owning them as a group could invite additional risk rather than diversification.
In light of their influence, we expect the Mag 7 will continue to shake up active managers’ scorecards in 2024. Investors would be wise to proceed with caution.
Sources: 1) FactSet; data as of Dec. 15, 2023; 2) Ibid; 3) FactSet, data as of Nov. 30, 2023; 4) FactSet, data as of Dec. 15; 5) Neuberger Berman Research and FactSet, data as of Dec. 15, 2023; 6) Ibid.
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