Magnificent 7 Returns

By: Grant Johnsey, Head of Client Solutions, Capital Markets, Americas

In the January episode of Market Pulse, I mentioned that much of the strong performance from the Magnificent 7 stocks—which have been driving the performance of the US stock market—is from revenue and earnings growth more so than multiple expansion. This graphic from Goldman Sachs does a nice job of illustrating this fact.

In this regard, the run-up in the prices of the Magnificent 7 stocks is distinct from similar price appreciation in the internet stocks (late 90’s to early 00’s) and Nifty Fifty stocks (late 60’s into 70’s), which were fueled far more by price-to-earnings multiple expansion. Just last week, investors saw this distinction as Meta and Amazon soared after their strong earnings releases, while Tesla and Google sold off after weaker guidance. While the “Long Mag 7” trade is crowded and does appear to be a little long in the legs, a comparison to Dot Com or Nifty Fifth stocks is not appropriate.

Investors should remain watchful for future price run-ups without corresponding earnings growth that could lead to a decoupling of stock performance and underlying fundaments.