The S&P 500 (^GSPC) has never been so skewed toward the top before.
The “Magnificent Seven” tech stocks — Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and Nvidia (NVDA) — make up 29% of the S&P 500’s market cap.
According to a graph of Goldman Sachs’ 2024 U.S. stock outlook, seven stocks now account for the largest percentage of the S&P 500’s market capitalization ever.
This perspective helps explain Goldman’s second chart, which shows that the Magnificent Seven have risen 71%, while the other 493 stocks have risen just 6%. The benchmark’s market-cap distribution means that larger stocks contribute more to the index’s movement, but the S&P 500 is up about 19% this year.
According to a Goldman Sachs survey, the S&P 500 has never been more lopsided at the top, with seven stocks rising and helping to lift the major averages. (Goldman Sachs Global Investment Survey)
An equity research team led by Goldman Sachs’ chief U.S. equity strategist, David Kostin, described the Magnificent Seven’s strong performance as “the defining feature of the stock market in 2023.” And they’re probably right.
Two other charts included in Goldman’s outlook show the Magnificent Seven outperforming 493 other stocks in key measures of stock price performance.
From 2013 to 2019, the Magnificent Seven stocks grew at a compound annual growth rate of 15% compared to 2% for the rest of the S&P 500. The gap has narrowed to 18% and 15%, respectively, over the past two years, but Goldman sees it widening again in the coming years: From 2023 to 2025, Goldman sees the Magnificent Seven growing at a compound annual growth rate of 11% compared to 3% for the rest of the S&P 500.
The Magnificent Seven also outperform their peers with net profit margins of 19% compared to 9.8% for the rest of the company. Not to mention, the long-term earnings per share growth forecast is 17% for the Magnificent Seven compared to 9% for the rest of the index.
“From a fundamental perspective, the earnings trajectory in recent years has explained the Magnificent 7’s performance relative to the overall market,” Kostin wrote. “The Magnificent 7’s superior performance this year has coincided with a recovery in margins and earnings that has outpaced the overall market weakness.”
He added: “The consensus is that the Magnificent Seven are expected to continue to grow faster than the rest of the index.”
Two charts from Goldman Sachs highlight why the Magnificent Seven tech stocks outperformed the rest of the benchmark index. (Goldman Sachs Investment Research)
Goldman also sees the Magnificent Seven’s shares likely to rise going forward, but given the group’s rise over the past year, they’re not exactly ideal trades for 2024.
The story continues
“The seven stocks have better sales growth rates, higher profit margins, higher reinvestment rates, stronger balance sheets, and trade at relative valuations in line with recent averages given their expected growth, compared to the other 493 stocks,” Kostin wrote. “However, the risk/reward profile of the trades is not particularly attractive given rising expectations.”
Josh Shaffer is a reporter for Yahoo Finance.
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