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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.
Bears have complained that the market’s apparent dependence on these stocks has become a major vulnerability.
But over at Bank of America, Savita Subramanian, head of equity and quantitative strategy at BofA Global Research, says the S&P 500
SPX
could still reach her 2024 year-end target of 5,000 even if members of the Magnificent Seven — Apple Inc.
AAPL,
Microsoft Corp.
MSFT,
Nvidia Corp.
NVDA,
Alphabet Inc. (both Class A
GOOGL,
and Class C
GOOG,
), Tesla Corp.
TSLA,
Amazon.com Inc.
AMZN,
and Meta Platforms Inc.
META,
— remain flat.
See: ‘Too many skunks at the party’: Bank of America strategist charts S&P 500’s path to 5,000
“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 said in the report.
She also dismissed concerns about the market’s reliance on the megacap stocks.
“Concerns about narrow breadth this year are misplaced in our view, given that with the exception of the Tech Bubble, bull markets since the 1980s ended with far better breadth than today’s,” she said.
The fact that U.S. stocks experienced a broad advance in November, with beaten-down small-caps even outperforming the S&P 500 and Nasdaq Composite, suggests that this process of broadening out is only beginning, Subramanian said. As more underperforming members of the S&P 500 play catch-up, the index as a whole should continue to climb, even if the advance of the Magnificent Seven stalls out.
Most stocks have plenty of room to climb, she pointed out. Right now, only 24% of stocks in the S&P 500 are presently trading within 10% of their all-time highs, below the historical average of 28%.
BANK OF AMERICA
Whether the Magnificent Seven can continue their stellar outperformance in 2024 has been one of the most pressing questions vexing Wall Street as analysts cobbled together their outlook reports for 2024.
On the one hand, history shows that once a stock has joined the ranks of the market’s most valuable, it’s prospects for growth start to diminish.
Wes Crill, senior investment director at Dimensional Fund Advisors, shows how stocks’ potential to beat the market starts to decline once a stock joins the top 10.
DIMENSIONAL FUND ADVISORS
“Rather than investing in the Magnificent 7 now and seeking additional exposure to these megacap stocks, investors should ensure their portfolios are broadly diversified to capture the returns of whatever companies ascend to the top in the future,” Crill said.
Others argue that the Magnificent Seven’s advance looks less remarkable when massive losses from 2022 are taken into consideration. These stocks all fell much further than the broader market as the Federal Reserve hiked interest rates at the fastest pace since the 1980s.
Nvidia, the best-performing member of the elite grouping, is up 217.9% in 2023. But its shares fell 50.3% in 2022, FactSet data show.
They also look more attractive when Wall Street’s growth expectations are taken into account. The average next-twelve-months PEG ratio for the Magnificent Seven stood at 1.38 on Thursday, according to FactSet data. That’s comfortably below the historical average, as MarketWatch’s Barbara Kollmeyer reported earlier this week.
Dow Jones Market Data show the Magnificent Seven have seen their aggregate market capitalization increase by $4.641 trillion through Wednesday’s close. That’s compared with a $6.027 trillion gain for the entire S&P 500, meaning the Mag 7 account for roughly 77% of the index’s advance in 2023. The S&P 500 is up nearly 19.5% year-to-date, FactSet data show.
Every member of the Magnificent Seven climbed on Thursday, helping to erase losses for the Nasdaq Composite
COMP
from earlier in the week.
