The Strategist

The Magnificent Seven, Six, Five, Four,...

The soaring shares of Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta and Tesla have propelled these tech giants to new heights, accounting for nearly 60% of the S&P 500 index's performance. However, concerns arise among some investors regarding the concentration and rapid growth of these seven companies. Despite their dominance, some cracks are beginning to show.

Date: 6 March 2024
Author: Chris Burger, CFA, Senior Equity Analyst, LGT Private Banking
Reading time: 10 minutes

Die Logos der sieben grössten Unternehmen der digitalen Wirtschaft: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia und Tesla. — © istock/MicroStockHub

In the classic western "The Magnificent Seven", seven cool gunslingers, led by Yul Brynner, Steve McQueen and Charles Bronson, fight for a good cause and help a Mexican village defend itself against a terrorising band of bandits. On the stock market, the nickname is used for the shares of Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta and Tesla. They have earned the superlative as the hype around artificial intelligence has sent the shares of the big US technology companies soaring: The US S&P 500 index rose 26% last year. The shares of the Magnificent Seven more than doubled on average over the same period, accounting for almost 60% of the index's performance. The other 493 stocks in the index accounted for the remaining 40% of performance, indicating a highly concentrated rally and relatively low market breadth. As a result, the market capitalisation of the seven companies rose to over USD 13.4 trillion. This is more than three times the GDP of the world's third largest economy (Japan (2022): USD 4.2 trillion).

Despite concerns, historical comparison does not suggest a bubble

Some investors are now concerned about the rapid growth and high degree of concentration. The share of the Magnificent Seven in the S&P 500 index has risen to 29%. This is one of the highest levels in the index's history. But concentration alone is hardly an indicator of a bubble - some of the leading indices in the UK, Hong Kong, France, Canada, Switzerland and Italy are even higher. The seven stocks also account for 22% of profits and are growing at well above-average rates thanks to their strong market positions and technological leadership. Profits for the Magnificent Seven rose by 56% in the last quarter, while the remaining 493 companies saw profits fall by an average of 2%. The difference is likely to remain significant over the next few years. Sales growth for the Magnificent Seven is forecast to be 12% per year until 2026, four times higher than for the rest of the index. With a price/earnings ratio (P/E) of 28.5x for the next twelve months, the Magnificent Seven are no longer a bargain, but given the growth potential, the valuation does not seem excessive either. Nor does a historical comparison suggest a bubble, given that the P/E of the Nasdaq 100 - the index as a whole, not the seven most expensive stocks - was over 70x during the "dotcom bubble". The Magnificent Seven are much more mature companies with high profitability and higher barriers to entry than many internet companies at the time.

From "Magnificent Seven" to "Fabulous Five"?

That said, the individual stocks in the Magnificent Seven are not immune to potential setbacks. Nor is the composition of the group set in stone, as market dynamics are constantly changing. Regulatory changes, technological breakthroughs, geopolitical events and economic developments may cause some of the current members to lose ground, while others may rise. Historically, stocks have been grouped by a catchy name or acronym. For example, the "Nifty 50" was popular in the 1960s and early 1970s, and the "Four Horsemen" (Cisco, Dell, Intel, Microsoft) caught the attention of investors in the 1990s. A few years ago, the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) were all the rage. What these stocks had in common was a high market capitalisation and strong performance. As soon as the latter was no longer the case, the group dissolved or was adjusted.

Given the weak performance of Tesla and Apple (and more recently Alphabet), there are calls for an adjustment to Wall Street's current favourite clique. Tesla shares are down 18% this year. Pressure is mounting from growing competition in the electric car industry, especially in China, where domestic manufacturers such as BYD, SAIC and Nio are challenging Tesla. In addition, the electric car maker reported a further drop in profits in January and its outlook also disappointed investors. Concerns about falling sales in China are also growing at Apple, which has seen its share price fall by 7% this year. The divergence between the stronger and weaker stocks in the group is therefore widening. Unless Tesla and Apple rebound soon, the Magnificent Seven could soon become the "Fabulous Five". Another option would be to replace Tesla and Apple with European technology groups ASML and SAP: they too have performed extremely well in recent months in the shadow of the original Magnificent Seven. After all, the Western classic of the same name was remade many years later with Denzel Washington, Chris Pratt and Ethan Hawke.

General risk information

This publication is a marketing communication. This publication is intended only for your information purposes. It is not intended as an offer, solicitation of an offer, or public advertisement or recommendation to buy or sell any investment or other specific product. The publication addresses solely the recipient and may not be multiplied or published to third parties in electronic or any other form. The content of this publication has been developed by the staff of LGT and is based on sources of information we consider to be reliable. However, we cannot provide any confirmation or guarantee as to its correctness, completeness and up-to-date nature. The circumstances and principles to which the information contained in this publication relates may change at any time. Once published information is therefore not be interpreted in a manner implying that since its publication no changes have taken place or that the information is still up to date. The information in this publication does not constitute an aid for decision-making in relation to financial, legal, tax or other matters of consultation, nor should any investment decisions or other decisions be made solely on the basis of this information. Advice from a qualified expert is recommended. Investors should be aware of the fact that the value of investments can decrease as well as increase. Therefore, a positive performance in the past is no guarantee of a positive performance in the future. The risk of exchange rate and foreign currency losses due to an unfavorable exchange rate development for the investor cannot be excluded. There is a risk that investors will not receive back the full amount they originally invested. Forecasts are not a reliable indicator of future performance. The commissions and costs charged on the issue and redemption of units are charged individually to the investor and are therefore not reflected in the performance shown. We disclaim, without limitation, all liability for any losses or damages of any kind, whether direct, indirect or consequential nature that may be incurred through the use of this publication. This publication is not intended for persons subject to a legislation that prohibits its distribution or makes its distribution contingent upon an approval. Persons in whose possession this publication comes, as well as potential investors, must inform themselves in their home country, country of residence or country of domicile about the legal requirements and any tax consequences, foreign currency restrictions or controls and other aspects relevant to the decision to tender, acquire, hold, exchange, redeem or otherwise act in respect of such investments, obtain appropriate advice and comply with any restrictions. In line with internal guidelines, persons responsible for compiling this publication are free to buy, hold and sell the securities referred to in this publication. For any financial instruments mentioned, we will be happy to provide you with additional documents at any time and free of charge, such as a key information document pursuant to Art. 58 et seq. of the Financial Services Act, a prospectus pursuant to Art. 35 et seq. of the Financial Services Act or an equivalent foreign product information sheet, e.g. a basic information sheet pursuant to Regulation EU 1286/2014 for packaged investment products for retail investors and insurance investment products (PRIIPS KID).

Risk information for single stock/single bond recommendations

Responsibilities

Responsible for compilation: LGT Bank (Switzerland) Ltd., Lange Gasse 15, CH-4002 Basel, Switzerland. Responsible supervisory authority: Swiss Financial Market Supervisory Authority FINMA, Laupenstrasse 27, CH-3003 Berne, Switzerland. Responsible for distribution within the meaning of article 8 FinMV [Financial Analysis Market Abuse Ordinance]: LGT Bank Ltd., Herrengasse 12, 9490 Vaduz, Principality of Liechtenstein. Responsible supervisory authority: Liechtenstein Financial Market Authority (FMA), Landstrasse 109, P.O. Box 279, 9490 Vaduz, Principality of Liechtenstein. Responsible for distribution within the meaning of the Directives on the Independence of Financial Research from the Swiss Bankers Association (SBA): LGT Bank (Switzerland) Ltd., Lange Gasse 15, CH-4002 Basel, Switzerland. Responsible supervisory authority: Swiss Financial Market Supervisory Authority FINMA, Laupenstrasse 27, CH-3003 Berne, Switzerland. Responsible for distribution within the meaning of section 48f BörseG [Stock Exchange Act] and the circular regarding financial analysis in connection with the interpretation of section 48f Stock Exchange Act [Börsegesetz (BörseG)]: LGT Bank AG, Zweigniederlassung Österreich, Bankgasse 9, A-1010 Vienna, Austria. Responsible supervisory authority: Liechtenstein Financial Market Authority (FMA), Landstrasse 109, P.O. Box 279, 9490 Vaduz, Principality of Liechtenstein; Austrian Financial Market Authority (FMA), Otto-Wagner-Platz 5, 1090 Vienna, Austria.

Precautions for avoiding and dealing with conflicts of interest

Employees of LGT Capital Partners Ltd., Pfäffikon, LGT Bank Ltd., Vaduz, LGT Bank (Switzerland) Ltd. and LGT Bank AG, Zweigniederlassung Österreich, who are responsible for compiling and/or distributing financial analyses, are subject to the applicable regulations as prescribed by law and supervisory legislation. In particular, measures were taken to avoid conflicts of interest (e.g. checking information exchanged with other employees, independence of the remuneration of the employees concerned, preventing the exertion of influence on these employees, compliance with rules on employee transactions, etc.). In addition, the handling of financial analyses is governed by an internal, group-wide directive issued by LGT Group Foundation, Vaduz. Adherence to the regulations and organizational instructions is monitored by a Compliance Officer.

Reference regarding analysis history

If this analysis was made available to any issuers mentioned in the publication prior to its distribution or publication, no changes were made to the price or rating after the issuer’s feedback. Important references for Liechtenstein can be found in articles 3 to 6 FinMV [Financial Analysis Market Abuse Ordinance], for Switzerland in the Swiss Bankers Association Directives on the Independence of Financial Research, and for Austria in section 48 BörseG [Stock Exchange Act], the Austrian analysis principles of the Österreichische Vereinigung für Finanzanalyse und Asset Management [Austrian Association for Financial Analysis and Asset Management, ÖVFA] and the Austrian Society of Investment Professionals (ASIP) and the Standard Compliance Code of the Austrian banking sector. A history of all ratings and recommendations is available at your LGT relationship manager.

Essential sources of information

Our analysts draw on publicly accessible information we consider to be reliable. For the compilation of the analysis, publications by domestic and foreign media and news services (e.g. Reuters, Bloomberg, VWD etc.), business publications, trade publications, statistics and rating agencies were used, together with information from the issuers of the analyzed securities – mainly via the Internet, but also in writing or by telephone. We also procure information from investment banks (sell-side research and primary research).

Reference regarding valuation rates

Unless otherwise stated or specified, the rates used in the analysis are normally the share prices provided by the news agencies Reuters and/or Bloomberg at the close of the stock exchange of the domestic market of the analyzed security or the relevant principal market of this security on the respective local stock exchange on the eve of the day of compilation.

Explanation of investment recommendations for stocks

We apply a “hybrid approach” (internal fundamental analysis combined with “theScreener”, an external, purely quantitative analysis tool). TheScreener is based on purely quantitative, i.e. computable variables such as (but not exclusively restricted to) profit adjustments of the past few weeks, stock valuation in relation to historical performance and comparison groups, the technical trend, performance in relation to the market etc. The assessment of the equity analysts, which is largely based on a qualitative analysis, does not need to match with the one of theScreener. For the overall judgement the assessment of the equity analysts overrides the one of theScreener. LGT Bank (Switzerland) Ltd. categorizes its analysis recommendations into five ratings: for a “Buy” recommendation we expect a relative outperformance compared with the sector. Only equities subjected to an internal fundamental analysis can be rated “Buy”. The recommendation “Attractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly positive” or “positive”. A moderate relative outperformance versus the index is expected. For equities that we rate as “Hold” we expect a performance largely in line with the one of the sector. This can comprise both equities for which a fundamental analysis has been carried out as well as equities that theScreener ranks as “neutral” versus the index. The recommendation “Unattractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly negative”. A moderate relative underperformance versus the index is expected. By contrast, “Sell” recommendations are based on the expectation of a relative underperformance compared with the sector. This can comprise both equities for which we are recommending “Sell” for fundamental reasons as well as equities that theScreener ranks as “negative” versus the index. Therefore the ratings always reflect a relative consideration versus the sector and/or specified index. The risk assessment is based on the individual judgement of the analyst (e.g. we assume a “high” risk for illiquid shares, highly indebted companies or shares from developing countries).

Reference regarding share valuation basis: The analysis compiled by LGT Bank (Switzerland) Ltd. are essentially based on secondary research relating to fundamental and quantitative analysis. Generally accepted valuation methods (valuation multiples, return figures, sector comparisons, comparisons with past valuations etc.) are used for this. The forecasts for the quantitative analysis are prepared with the help of mathematical-statistical procedures (see statements above concerning the analysis tool “theScreener”). Economic indicators such as interest rates, currencies, commodity prices and assumptions relating to the economy are included in the overall assessment. The mood of the market also affects the company valuation. Moreover, many of the approaches are based on estimates and expectations that may change quickly and without warning, depending on developments specific to the industry. Therefore, the recommendations derived from the analysis can also change accordingly. The investment judgements generally refer to a period of 6 to 12 months. However, they are also subject to market conditions and represent a snapshot of the situation. They may be achieved more quickly or more slowly or be revised upwards or downwards.

Explanation of investment recommendations for bonds

We employ both qualitative and quantitative methods to derive our recommendations, which are to be seen as relative to sector/quality peers among comparable maturities. “Buy” and “Sell” recommendations demand a qualitative in-house analyst opinion, in which we incorporate both historical and projected financial results and credit metrics as well as past and anticipated company and sector-specific observations and trends. We recommend “Buy” for a security for which we expect a strong relative outperformance compared to sector/quality peers among comparable maturities. We recommend “Sell” if we expect strong relative underperformance compared to sector/quality peers among comparable maturities. The ratings “Attractive”, “Hold” and “Unattractive” can be based purely on a quantitative approach, which includes the market price of credit risk, valuation of equities and associated instruments, corporate leverage, liability structure, size, and agency rating. We recommend “Attractive” for a security for which we expect a relative outperformance compared to sector/quality peers among comparable maturities. We recommend “Hold” if we expect an average performance compared to sector/quality peers among comparable maturities. We recommend “Unattractive” if we expect a relative underperformance compared to sector/quality peers among comparable maturities.

This publication does not constitute either an issuing or listing prospectus, nor any other kind of prospectus. This publication also does not constitute any offer for subscription or any other transaction or obligation.

Definition of rating categories of S&P and Moody’s which are relevant for us:

AAA/Aaa: Borrower with highest credit quality. Default risk also virtually negligible over the longer term
AA/Aa: Safe investment, default risk virtually negligible but more difficult to assess in the longer term
A: Safe investment as long as no unforeseen events impair the overall economy or sector
BBB/Baa: Average investment. However, problems must be expected if the overall economy deteriorates
BB/Ba: Speculative investment. Defaults must be expected if the economic situation deteriorates
B: Highly speculative investment. Defaults are likely if the economic situation deteriorates

For more information on our methodology for bonds, please contact your LGT relationship manager or your local LGT Group company.

Risk information for fund recommendations

No guarantee is provided that the publications and information are up to date. Investment decisions should therefore always be made on the basis of the current prospectus and/or the complete documentation and publication of the third party/fund issuer (in particular the key investor information) and following consultation with an expert. This fund recommendation does not meet all the statutory requirements for guaranteeing the impartiality of financial research. The Swiss Bankers Association Directives on the Independence of Financial Research do not apply to this recommendation. It does not constitute financial analysis within the meaning of the Liechtenstein Ordinance on the Preparation of Financial Analysis according to the Law against Market Abuse in the Trading of Financial Instruments. LGT Bank (Switzerland) Ltd. and/or its affiliated companies are not subject to any prohibition of trading prior to the publication of financial research with regard to the recommended funds. The research can form the basis for the investment decisions of LGT Bank (Switzerland) Ltd. itself and/or those of its affiliated companies. It is possible that LGT Bank (Switzerland) Ltd. and/or its affiliated companies might receive retrocessions from the issuers of the funds dealt with here.

All selected third-party funds are subjected to a thorough quantitative and qualitative analysis process prior to inclusion in the LGT FundGuide. Selected third-party funds are also subject to a continuous monitoring process. Austria: Investment decisions should only be made on the basis of the current KIID and valid prospectus following consultation with an expert.

Country-specific information

LGT funds: The current full prospectus, the Key Investor Information Document (KIID) and the current annual and semi-annual reports can be obtained free of charge from the fund administrator and from the following addresses: Liechtenstein: LGT Bank Ltd., Herrengasse 12, FL-9490 Vaduz and as an electronic version at www.lafv.li; representative for Switzerland: LGT Capital Partners Ltd., Schützenstrasse 6, CH-8808 Pfäffikon; main distributor and paying agent for Switzerland: LGT Bank (Switzerland) Ltd., Lange Gasse 15, CH-4002 Basel; paying agent in Austria: Erste Bank der österreichischen Sparkassen AG, Am Belvedere 1, A-1010 Vienna.

Risk information for recommendations concerning structured products

This recommendation was prepared by LGT and not by an independent financial analysis department. Therefore this recommendation does not meet all the statutory requirements for guaranteeing the impartiality of financial research. The Swiss Bankers Association Directives on the Independence of Financial Research do not apply to this recommendation. Investments in structured products entail a wide range of risks. Investment decisions should therefore only be made on the basis of the valid prospectus or complete documentation following consultation with an expert. This does not constitute financial analysis within the meaning of the Liechtenstein Ordinance on the Preparation of Financial Analysis according to the Law against Market Abuse in the Trading of Financial Instruments.

Risk information in connection with foreign currencies

Information about foreign currencies were produced by LGT Bank (Switzerland) Ltd. and not by an independent financial analysis department. Therefore, forecasts, observations and price information are subject to change at any time and there is no guarantee that the information is complete. Investment decisions should accordingly be made in consideration of the investor’s personal risk tolerance and within the overall context of the portfolio. The Swiss Bankers Association Directives on the Independence of Financial Research do not apply to currency analysis. Such analyses do not constitute financial analysis within the meaning of the Liechtenstein Ordinance on the Preparation of Financial Analysis according to the Law against Market Abuse in the Trading of Financial Instruments.

Risk information on LGT Sustainability Rating

To determine the LGT Sustainability Rating, the companies, countries and supranational organizations underlying the investment vehicles are assessed according to criteria defined by LGT with respect to the areas of environment (E), social issues (S) and corporate governance (G). Corporate and country-specific sustainability data (raw data) of external data providers feed into this rating. The LGT Sustainability Rating is a result based on criteria and calculation methods determined by LGT. It does not claim to be exhaustive, accurate or up to date. The LGT Sustainability Rating is not substantiated by LGT. Any liability of LGT is excluded. The LGT Sustainability Rating does not constitute advice, an offer, a solicitation or invitation to submit an offer; it is neither a basis for a decision nor a recommendation to buy or sell investment vehicles or other specific products, and does not constitute advertising for products or services. Advice from a qualified specialist before making an investment decision is recommended. Investments may be subject to fluctuations. A high LGT Sustainability Rating and a high ESG score do not guarantee a good or better performance of the investment vehicle or other products, in particular in comparison with an investment with a lower LGT Sustainability Rating. The LGT Sustainability Rating must be strictly separated from other analyses and assessments.

Risk information for US assets

This investment proposal might contain US assets located in the USA (known as “US situs assets”) which might trigger US inheritance tax consequences. This means, for example, that the estate of the decedent neither domiciled in the USA nor with US citizenship might become liable for tax payment to the US tax authority. Subject to a ceiling, non-US persons may enjoy tax exemptions and reductions if they are entitled to benefit from a double taxation agreement (DTA) which provides for such relief. LGT recommends that clients consult a qualified tax advisor for further information on US inheritance tax and the associated reporting obligations and tax liabilities in the USA. LGT does not automatically report tax liabilities to the Internal Revenue Service (IRS), the US tax authority.

Information related to LGT (Middle East) Ltd.

Where this publication has been distributed by LGT (Middle East) Ltd., related financial products or services are only available to professional investors as defined by the Dubai Financial Services Authority (DFSA). LGT (Middle East) Ltd. in the Dubai International Financial Centre (Registered No. 1308) is regulated by the DFSA. LGT (Middle East) Ltd. may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business: The Gate Building (West), Level 2, Dubai International Financial Centre, P.O. Box 506793, Dubai, United Arab Emirates.