Examining the Equity market dominating 'Magnificent Seven'

Spotlight: The Magnificent Seven

Within developed market equities, we can see an interesting trend for a small number of companies that seem to be carrying the heavy load when it comes to generating returns so far this year. The so called “Magnificent Seven” stocks which comprise of seven tech focused companies (Alphabet, Amazon, Apple, Meta, Microsoft, Tesla, and NVIDIA), have benefited from the positive sentiment around the benefits of Artificial Intelligence (AI) and generated ‘magnificent’ returns so far, year to date.  

The chart above illustrates that £100 invested at the beginning of the year in developed market equities would generate an impressive £12 in profit; 60% of which is down to the Magnificent Seven, with the remaining 40% of returns being generated by some 1500 other companies in the index. The Magnificent Seven did account for 18.39% of the market capitalisation of the MSCI world index as of the 29^th September 2023 however. This is continuing a strong run since the start of 2018 for these seven companies – see chart below.

 Cumulative performance of the magnificent seven is calculated using the total price return of the combined seven stocks (Apple, Amazon, Google, Meta, Microsoft, Nvidia, and Tesla).

However, having too much concentration in these seven stocks means placing heavy reliance in a very small number of companies, sectors, and geographies. It is key to remember that whilst so far this year tech has certainly been the place to be, over time certain sectors come in and out of favour and just because the Magnificent Seven are the stars of today, does not necessarily mean that they will remain the stars of tomorrow.
 

The noise

• The UK economy expanded by 0.2% in August from July, in line with economist estimates per data from the Office for National Statistics. The data revealed that the services sector experienced growth that was slightly stronger than anticipated, expanding by 0.4% in August compared to July. In contrast, both manufacturing and construction saw declines of 0.8% and 0.5% respectively. The bigger picture remained one of sluggish growth for the UK following last year’s surge in inflation and 14 back-to-back interest rate hikes by the Bank of England. Three years of economic shocks, high interest rates, and inflation, skills shortages, and trade barriers with the European Union are all issues facing UK firms at present.

• The Competition and Markets Authority (CMA) has cleared Microsoft’s $69 billion deal to buy Activision Blizzard. They had initially moved to block the deal in April this year, following concerns that Microsoft would dominate the growing cloud gaming market. However, a revised deal was put forward that included selling cloud gaming rights outside Europe to rival firm Ubisoft. This is intended to ensure that Microsoft won’t have a stranglehold over cloud gaming.

• The European Union has approved the world’s first standard to govern green bonds, with a goal to help fight greenwashing. A green bond is a bond designed to raise money and support companies with specific climate-related or environmental projects. The standard will allow bond issuers that follow the regulations to use the designation “European green bond” for the marketing of their bond, with hopes that it will allow investors to have more confidence investing in sustainable businesses. The standard should also provide investors further avenues for ESG investment, as almost a third of responses to Capital Group’s Global ESG survey indicated they are set to increase allocations to ESG bonds as inflation recedes and interest rates peak.
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The numbers

GBP Performance to 12/10/2023

Source: Bloomberg, data as at 12/10/2023

The nuance

US consumer prices rose 0.4% in September, rising more than expected as prices are up 3.7% from a year ago. Surging rents account for more than half of the increase in CPI, but the steady easing of underlying inflation pressures upheld expectations that the Federal Reserve will keep interest rates high for the foreseeable future. Conflict in the Middle East and higher US treasury yields are likely to discourage the Federal Reserve from increasing interest rates any further though. Core CPI, the inflation measure that strips out volatile elements such as food and energy rose 0.3% in September, its smallest increase in two years. The US Labour department’s latest report sent the dollar index (a  measure of the US currency against six other global currencies) up on Thursday, as it made its biggest single-day gain since March.

Although economists expect rents to decline in the coming months, tightness in the labour market will mean there is still a way to go to reach the Fed’s 2% inflation target.

All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.