Mag 7 vs. S&P 500: A Tale of Two Markets

The Magnificent Seven (Mag 7) – Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia, and Tesla – have been the driving force behind the U.S. stock market's impressive performance. However, their dominance has raised concerns about market concentration and sustainability. To assess their performance, we can compare their earnings growth estimates and valuations with those of the broader S&P 500 index.

As of January 2, 2024, the Mag 7 had an average forward P/E ratio of about 35x, significantly higher than the S&P 500's 15.5x. This high valuation reflects investors' enthusiasm for these tech giants, but it also raises questions about their ability to grow into their valuations. In terms of earnings growth, the Mag 7 boasted an estimated growth rate of 20.8% for 2024, compared to the S&P 500's 11.5% and the S&P 500 sans-Mag 7's 6.7%. For 2025, the estimates were 17%, 12%, and 6.7% respectively. While the Mag 7's long-term earnings growth prospects remain robust, the uncertainty band around these estimates is higher, emphasizing the need for diversification.

The Mag 7's dominance in the U.S. stock market has led to concerns about market concentration. These seven companies account for over 30% of the U.S. market cap, raising questions about risk and sustainability. However, their strong fundamentals, including high profit margins and cash reserves, mitigate these risks. The Mag 7's use of stock buybacks inflates earnings per share, which could be a counterpoint to their attractiveness. As the Mag 7's dominance continues, investors may want to consider diversifying their portfolios to include a broader set of stocks within the S&P 500 and non-U.S. markets.



In conclusion, while the Mag 7 stocks have delivered remarkable returns, their high valuations and the uncertainty surrounding their earnings growth estimates suggest that investors should consider a more diversified portfolio, including exposure to other tech-focused indices and non-U.S. markets. By balancing growth and value stocks, investors can better manage risk and capitalize on the enduring business models of these tech giants.