Magnificent Seven: Riding to the rescue
Despite signs of a slowdown in the US economy the US equity market, as shown by the headline S&P 500 (the 500 largest listed companies in the US) shows remarkable resilience. Up over 13% since the beginning of the year, equity investors may be believing that all is well, but that is down to the Magnificent Seven.
The Magnificent Seven stocks of Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia and Tesla have driven the broader US equity market higher. These 7 companies account for a combined value of $10.7 trillion, 27% of the value of the whole S&P 500.
Magnificent Seven: year to date changes in price, earnings, valuation, and current valuation
Source: Bloomberg, Artorius
Distilling their performance individually, in the table above, one can see that only Meta and Nvdia have seen an uplift to their earnings through the course of 2023. Other stocks have seen broadly flat earnings, with Tesla’s expected earnings falling by over a third, yet all have seen gains of more than 30% since the start of the year driven entirely by an uplift in valuation. Are these year-to-date price gains ephemeral without an improvement in the profit outlooks?
That the US equity market has risen on the back of the monopolistic giants has resulted in a similar shape of returns to the late 1990s. The low percentage of stocks outperforming the index shows how narrow the rally is.
S&P 500: percentage of stocks outperforming the index has fallen sharply and resembles 1999
Source: Jefferies, Artorius
As a result of the narrowness of the rally in US equities, the typical outcomes for US equity investors over the past year has been poor if they have used active US equity funds. Unlike 2022, when most active managers outperformed the falling market, only 33% of funds have kept up with the index year-to-date, which is lower than normal. Boring index management has a lot to be said for it.
“I never use valuation to time the market. I use liquidity considerations and technical analysis for timing. Valuation only tells me how far the market can go once a catalyst enters the picture to change the market direction."
Stan Druckenmiller
The quote from investment legend, Stan Druckenmiller, highlights that although valuation shouldn’t be used for timing the market, valuations can be a guide for longer term outcomes as and when catalysts (monetary policy or changes in underlying fundamentals) alter. Valuations for the Magnificent Seven look unappealing in our view especially given the aggregate pattern of their earnings growth.
Film fans will remember that 4 out of the Magnificent Seven died.
All expressions of opinion reflect the judgment of Artorius at 16th June 2023 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.