The rise of the elite tech stocks has left the S&P 500 at its most concentrated in at least the last 100 years, according to Deustche Bank analysts, posing risks and spillovers for other assets.
Among fund managers surveyed by Bank of America, 61% said that "Long Magnificent Seven" is currently the most-crowded trade.
Lofty valuations could liken the current tech stock euphoria to the Dotcom bubble of 1999-2000, but the situation today is vastly different.
Investors have been piling into the 'Magnificent Seven' stocks—an elite group of some of the biggest technology companies—driving stocks to sky-high valuations, and major indexes to record highs, on expectations that artificial intelligence (AI)-related business growth will support continued gains.
"The Mag 7’s rise has left the S&P 500 at around its most concentrated in at least the last 100 years. Perhaps not since the bubble of 1929 have so few stocks had such high weightings to the overall market" Deutsche Bank analysts led by Jim Reid wrote in a research note Tuesday. "In turn, their future performance will likely impact the majority of global assets to some, or to a great, degree going forward."
While the AI boom, network effects and U.S. government incentives could propel the Magnificent Seven stocks further, analysts at Deutsche Bank cited heightened regulatory and public scrutiny of big tech companies and AI in general, as well as geopolitical factors, as potential headwinds.
"In addition, no-one quite knows how AI will pan out and who will win," Deutsche Bank said in the report. "Tech changes rapidly over time. Current high valuations assume Mag 7 will always win."
For now, that seems to be the prevailing wisdom. According to Bank of America's latest Global Fund Manager Survey, also released Tuesday, 61% of fund managers believe that "Long Magnificent Seven" is currently the most-crowded trade, with "Short China equities" coming in next at 25%. The survey showed that allocation to tech stocks is at its highest level since August 2020.
Unlike the Dotcom Bubble
Lofty valuations could liken the current tech stock euphoria to the Dotcom bubble of 1999-2000, according to the Man Institute, but the situation today is vastly different.
"The market is not rewarding just any unproven business models like it did during the tech bubble, this rally is driven by proven business models generating billions of additional free cash flow dollars," the institute wrote in a note Tuesday. "With substantial capital expenditure and an acceleration in Artificial Intelligence (AI) algorithms, there is enough momentum suggesting a robust foundation for current and (possibly even future) valuations to drive real economic growth."
Shares of all of the Magnificent Seven members fell on Tuesday, in line with a broader market decline prompted by data showing that U.S. inflation in January hadn't moderated as much as economists expected, which quelled optimism that the Federal Reserve could start cutting interest rates soon.
Nonetheless, shares of each of the group's members, with the exception of Tesla (down 12%), have posted significant gains over the past year. Nvidia shares have risen the most, tripling over the past year through Tuesday's close, while Meta has risen 156%. Shares of Amazon are up nearly 70%, while Alphabet and Microsoft have each gained about 50%, and Apple is up about 20%.
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While the AI boom, network effects and U.S. government incentives could propel the Magnificent Seven stocks further, analysts at Deutsche Bank cited heightened regulatory and public scrutiny of big tech companies and AI in general, as well as geopolitical factors, as potential headwinds.
The Magnificent Seven stocks have delivered magnificent returns. In 2023, the group had delivered an average return of 71% (through mid-November), according to data from Goldman Sachs (GS 1.4%). That compared to a much more pedestrian return of 6% for the other 493 stocks in the S&P 500 for the year.
Dubbed the Magnificent Seven stocks, Apple, Microsoft, Google parent Alphabet, Amazon, Nvidia, Meta Platforms and Tesla lived up to their name in 2023 with big gains. But the middle part of the second quarter of 2024 showed a big divergence of returns.
As stocks declined in value, brokers and investment companies for stocks sold on margin required more money from buyers to compensate for the loss of collateral, and buyers themselves raced to sell stocks to minimize their losses.
We believe paying dividends is one important measure of a quality stock. A company's ability to raise dividends consistently can demonstrate profitability. Companies that have excess cash flow and strong financial positions often choose to pay dividends to attract and reward their shareholders.
Investors' concerns that the Magnificent Seven bubble may soon be about to burst could be completely unfounded, according to new analysis from JPMorgan, which argues the top-performing tech stocks are actually undervalued compared to rival stocks.
The key takeaway is that these stocks make up about 30% of the S&P 500's total weighting, although they make up just 1.6% of the stocks in the index. And because their performance has been incredibly strong, they have made the overall index's performance far better than it otherwise would have been.
Investors began selling madly. Share prices plummeted. Funds that fled the stock market flowed into New York City's commercial banks. These banks also assumed millions of dollars in stock-market loans.
What Were the Causes of the 1929 Stock Market Crash? There were many causes of the 1929 stock market crash, some of which included overinflated shares, growing bank loans, agricultural overproduction, panic selling, stocks purchased on margin, higher interest rates, and a negative media industry.
On October 29, 1929, "Black Tuesday" hit Wall Street as investors traded some 16 million shares on the New York Stock Exchange in a single day. Around $14 billion of stock value was lost, wiping out thousands of investors. The panic selling reached its peak with some stocks having no buyers at any price.
Stocks offer an opportunity for higher long-term returns compared with bonds but come with greater risk. Bonds are generally more stable than stocks but have provided lower long-term returns. By owning a mix of different investments, you're diversifying your portfolio.
The first and foremost factor to consider when selecting stocks is the company's fundamentals. This includes examining the company's financial statements, such as its income statement, balance sheet, and cash flow statement. Pay attention to metrics like revenue growth, earnings per share (EPS), and profit margins.
For those out of the loop, the “Magnificent 7” stocks — Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA) — drove the S&P 500 in 2023 and account for about half of the weighting of the Nasdaq index.
Add up those components and these seven stocks deliver 29 percent of the S&P 500's performance. Meanwhile, the S&P 500's other 490-some stocks deliver the remaining 71 percent. As great as this weighting is, it's even more lopsided in the Nasdaq 100: Apple – 8.09 percent.
The “Magnificent Seven” might sound like the title of an old Western film or what a large family might name its group chat, but in finance the moniker is being used to describe a group of high-performing tech stocks: Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta and Tesla.
The Roundhill Magnificent Seven ETF trades on the Nasdaq under the ticker symbol 'MAGS'. The Fund previously traded under the symbol 'BIGT' until November 9, 2023. What are the fees for the Roundhill Magnificent Seven ETF? The Fund's gross expense ratio is 0.29% per year.
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