The recent prominence of the Magnificent Seven index in dictating market movements highlights a significant trend. This year has seen a further consolidation of market leadership, with notable players such as Amazon, Meta, Microsoft, and Nvidia taking center stage. Dubbed the ‘Fab-4,’ these entities have collectively driven nearly 75% of the S&P 500’s total return. Such levels of market concentration have been rare occurrences over the past five decades, reminiscent of episodes such as the energy boom of the early 1970s, the consumer stock dominance in the early to mid-1980s, the tech surge in the early 2000s, and the banking stock dominance in 2007 and 2008.
However, three of the Seven have lagged behind their counterparts. Specifically, Tesla (-31.1%), Apple (-8.5%), and Google (+1.0%). Meanwhile, the other four have rewarded investors with robust double-digit returns. Microsoft (+12.1%), Amazon (+15.8%), Meta (+40.2%), and Nvidia (+80.5%) have particularly thrived, with Nvidia benefiting significantly from the ascent of AI technology.
At times, a narrative gains traction in financial and social media, fuelling investor frenzy, as seen with the Magnificent Seven. The pertinent question arises: can a stock truly deliver on the earnings growth implied by its valuation? There’s a possibility that the market may be either underestimating or overestimating the growth potential of some Magnificent Seven stocks. Diversification across a broad spectrum of key themes offers investors the opportunity to mitigate risks and seize potential returns.
It’s crucial to acknowledge the nuances within the market landscape and adopt a diversified approach to investment strategies. By embracing a range of themes and sectors, investors can position themselves to capitalize on opportunities while safeguarding against undue concentration risks.
source: Ninety-One SA
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