The S&P 500 (^GSPC) has never been this high.
29 tech stocks known as the “Magnificent Seven” include Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and Nvidia (NVDA). %. of the S&P 500 market capitalization.
And, according to a graph from Goldman Sachs’ 2024 U.S. Stock Outlook, this would be the largest share of the S&P 500’s market capitalization ever by just seven stocks.
This perspective helps explain Goldman’s second chart, which shows the Magnificent Seven up 71%, while the other 493 stocks rose just 6%. The S&P 500 index has risen about 19% this year, as large-cap stocks can contribute more to the index’s movement given the benchmark’s market capitalization distribution.
Goldman Sachs research shows the S&P 500 index has never been this high, leading to gains in seven stocks and leading to gains in major averages. (Goldman Sachs Global Investment Research)
Goldman Sachs’ equity research team, led by chief U.S. equity strategist David Kostin, described the Magnificent Seven’s outperformance as “the defining feature of the stock market in 2023.” And perhaps rightly so.
Two other charts included in Goldman’s Outlook show how the Magnificent Seven outperforms 493 other stocks on key metrics that typically drive stock performance.
From 2013 to 2019, Magnificent Seven stock grew at a compound annual growth rate of 15%, compared to 2% growth for the rest of the stocks. That margin has shrunk to 18% and 15%, respectively, over the past two years, but Goldman expects it to widen again in the coming years. Goldman expects the Magnificent Seven to grow at a compound annual growth rate of 11% from 2023 to 2025, compared with 3% growth for the rest of the S&P 500.
Magnificent Seven’s net profit margin is also impressive, at 19%, which is higher than other companies’ 9.8%. Not to mention, the long-term earnings per share growth forecast is 17% for Seven, compared to just 9% for the other companies in the index.
“From a fundamental perspective, the recent earnings trajectory explains Magnificent 7’s performance relative to the rest of the market,” Kostin wrote. “Magnificent 7’s outperformance this year has been matched by a recovery in margins and revenue that outweighed the rest of the market’s overall decline.”
He added: “The consensus is that the Magnificent 7 will continue to grow faster than other indexes.”
Two charts from Goldman Sachs highlight why the Magnificent Seven’s tech stocks have outperformed other benchmark indexes. (Goldman Sachs Investment Research)
Goldman believes Magnificent Seven’s stock price is also likely to rise further, but given the group’s gains over the past year, it’s not an ideal trade for 2024.
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Kostin said, “Compared to the other 493 stocks, these seven stocks have faster expected sales growth, higher profit margins, higher reinvestment ratios, stronger balance sheets, and recent “They are trading at relative valuations that are in line with the average.” “However, given the heightened expectations, the risk-reward profile of this deal is not particularly attractive.”
Josh Schafer is a reporter for Yahoo Finance.
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