It’s becoming increasingly difficult to imagine the bull market continuing into 2023 without help from the Magnificent Seven, a group of mega-cap technology stocks that have driven nearly all of the S&P 500’s rise this year.
Bears have complained that the market’s apparent reliance on these stocks has become a major vulnerability.
But at Bank of America, Savita Subramanian, head of equity and quantitative strategy at BofA Global Research, says the S&P 500 SPX could still hit its 2024 year-end target of 5,000 even if members of the Magnificent Seven – Apple Inc.
Alphabet Inc. (both Class A
and class C
), Tesla Corp.
and Meta Platforms Inc.
– stay flat.
See: “Too many skunks at the party”: Bank of America strategist outlines S&P 500 path to 5,000
“If the seven stocks remain unchanged and forward earnings multiples for the rest of the market remain at around 15x on average, projected EPS growth would take the index to 5100, above our target,” Subramanian said in the report .
She also dismissed concerns about the market’s reliance on megacap stocks.
“Fears of narrow breadth this year are misplaced in our view as bull markets since the 1980s, with the exception of the tech bubble, have ended with far greater breadth than today,” she said.
The fact that U.S. stocks rallied broadly in November, with beaten-down small-caps even outperforming the S&P 500 and the Nasdaq Composite, suggests this process of widening is just beginning, Subramanian said. As more underperforming members of the S&P 500 catch up, the index as a whole should continue to rise, even if the Magnificent Seven’s rise stalls.
Most stocks still have a lot of room for improvement, she emphasized. Currently, only 24% of stocks in the S&P 500 are trading within 10% of their all-time highs, which is below the historical average of 28%.
Whether the Magnificent Seven can continue their stellar outperformance in 2024 was one of the most pressing questions on Wall Street as analysts compiled their 2024 forecast reports.
On the one hand, history shows that once a stock becomes one of the most valuable in the market, its growth prospects begin to deteriorate.
Wes Crill, senior investment director at Dimensional Fund Advisors, shows how stocks’ potential to beat the market decreases once a stock is included in the top 10.
“Instead of investing in the Magnificent 7 now and seeking additional exposure to these mega-cap stocks, investors should ensure their portfolios are broadly diversified to benefit from the returns of any company that rises to the top in the future.” said Crill.
Others argue that the Magnificent Seven’s progress seems less remarkable when taking into account the massive losses from 2022 onwards. These stocks all fell much more than the broader market as the Federal Reserve raised interest rates at the fastest pace since the 1980s.
Nvidia, the best-performing member of the elite group, is up 217.9% in 2023. But its shares fell 50.3% in 2022, FactSet data shows.
They also look more attractive given Wall Street’s growth expectations. The Magnificent Seven’s average 12-month PEG ratio was 1.38 as of Thursday, according to FactSet data. That’s well below the historical average, as MarketWatch’s Barbara Kollmeyer reported earlier this week.
Dow Jones market data shows the Magnificent Seven’s total market capitalization rose by $4.641 trillion through Wednesday’s close. That compares to a gain of $6.027 trillion for the entire S&P 500, meaning the Mag 7 accounts for about 77% of the index’s 2023 gain. The S&P 500 has risen nearly 19.5% since the beginning of the year, FactSet data shows.
All members of the Magnificent Seven rose on Thursday, helping to offset the Nasdaq Composite COMP’s losses from earlier in the week.