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Perspectives

Magnificent 7 Continues to Dominate Market & Earnings Past and Present

by Fortem Financial November 13, 2023

Several weeks ago, we decided to reconstruct the S&P 500 by excluding the Magnificent 7 stocks from the sectors in which they normally reside and by creating a new separate sector for them. The characteristics of the new group of stocks were even more surprising than we might have thought. Looked at in this way as of the end of the third quarter, these seven stocks would represent the Index’s largest “sector” at roughly 28% of the S&P 500, while representing only 17% of its earnings. (Financials would be a distant second at a mere 13%, 1500 basis points away, but represent more than 21% of the Index’s total earnings.) We also found that the Magnificent 7 represented nearly the entirety (~92%) of the S&P’s performance YTD. Not surprisingly, these companies are trading at much greater than market multiples. A look at expectations for their earnings and margins on the following pages, however, reveals why. This type of concentration is a major challenge for any portfolio manager trying to beat the broader S&P 500. A portfolio manager of a fund legally deemed to be “diversified” might legally be precluded from replicating the current weightings of the Index and thus be helpless in attempting to outperform it if the stocks continued to rise. With about 80% of earnings season complete two major features emerged: 1) this is the first quarter in four in which the S&P is posting a gain in year/year earnings growth; and 2) companies who miss earnings are being punished far more than companies who beat earnings are being rewarded to an unusually large extent. It appears that as rates rise, the stakes for all companies, but especially the Magnificent 7, seem to be going up.

S&P Sector Statistics + Magnificent 7

Widespread Between Sector Weight & Earnings Weight of Mega-Cap Stocks

Magnificent 7 vs. S&P 500

Source: Strategas

 

Market and Index Changes for the Week Ending 11/10/2023

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.

 

Sincerely,

Fortem Financial
(760) 206-8500
team@fortemfin.com

 

 

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Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017, 2018 Five Star Wealth Managers!

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The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided. Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf
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