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The Power of the Magnificent Seven


It’s becoming harder to imagine the 2023 bull market continuing without help from the Magnificent Seven, a group of megacap technology stocks that has driven nearly all of the S&P 500’s advance this year.

The market’s reliance on these seven stocks has raised concerns among bears, who argue that it leaves the market vulnerable. However, Savita Subramanian, head of equity and quantitative strategy at Bank of America’s Global Research division, believes that the S&P 500 still has the potential to reach her year-end target of 5,000 in 2024, even if the Magnificent Seven—Apple Inc., Microsoft Corp., Nvidia Corp., Alphabet Inc., Tesla Corp., Inc., and Meta Platforms Inc.—remain stagnant.

The Numbers Behind the Market

“If the seven stocks flatline, and if the multiples on forward earnings for the rest of the market flatlines, at about 15x on average, forecast EPS growth would put the index at 5100, above our target,” Subramanian stated in a recent report.

She further dismissed concerns about the market’s dependency on these megacap stocks, arguing that worries about narrow breadth are unwarranted. When compared to previous bull markets since the 1980s, excluding the Tech Bubble, today’s market actually boasts better breadth.

Broadening Out: A Sign of Strength

According to Subramanian, the recent broad advance of U.S. stocks in November is a positive sign. Even beaten-down small-caps managed to outperform both the S&P 500 and Nasdaq Composite. This trend indicates that the process of broadening out is only in its early stages.

As underperforming members of the S&P 500 begin to catch up, the index as a whole should continue its ascent, even if the Magnificent Seven’s progress comes to a halt.

Room for Growth

Subramanian also noted that most stocks still have plenty of room to climb. Currently, only 24% of stocks in the S&P 500 are trading within 10% of their all-time highs. This figure is below the historical average of 28%, suggesting that there is ample opportunity for further growth.

In conclusion, while the Magnificent Seven has played a crucial role in driving the bull market, the S&P 500 is not entirely reliant on their performance. With the potential for broadening participation and room for other stocks to rise, Subramanian remains optimistic about the index reaching its targets.

The Magnificent Seven: A Look at Their Prospects in 2024

As Wall Street analysts compile their outlook reports for 2024, the question of whether the Magnificent Seven can maintain their outstanding performance remains a hot topic.

Historical data suggests that once a stock becomes one of the market’s most valuable, its growth potential starts to dwindle. Wes Crill, senior investment director at Dimensional Fund Advisors, highlights how a stock’s ability to outperform the market diminishes once it joins the top 10.

Crill advises investors to focus on broad diversification rather than solely investing in the Magnificent Seven. This approach ensures that portfolios can capture the returns of future top-ranking companies.

However, some argue that the Magnificent Seven’s impressive gains appear less remarkable when considering the significant losses experienced in 2022. These stocks suffered more significant declines than the broader market due to the Federal Reserve’s rapid interest rate hikes – the fastest since the 1980s.

For instance, Nvidia, the top-performing member of this elite group, has seen a staggering 217.9% increase in 2023. However, FactSet data reveals that its shares plummeted by 50.3% in 2022.

The allure of the Magnificent Seven becomes more enticing when factoring in Wall Street’s growth expectations. According to FactSet data, the average next-twelve-months PEG ratio for these stocks currently stands at 1.38 – comfortably below the historical average.

Data from Dow Jones Market Data reveals that the Magnificent Seven have collectively increased their market capitalization by $4.641 trillion as of Wednesday’s close. In comparison, the entire S&P 500 gained $6.027 trillion, meaning that the Mag 7 accounted for approximately 77% of the index’s advancement in 2023. The S&P 500 itself has grown approximately 19.5% year-to-date, as reported by FactSet.

On a positive note, every member of the Magnificent Seven experienced gains on Thursday, contributing to the recovery of the Nasdaq Composite COMP from earlier losses in the week.

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