In the financial landscape of 2023, the spotlight is on the “Magnificent Seven” — Apple, Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla — the tech giants that have propelled the S&P 500 to a 14% increase this year. These stocks, with their eye-catching performance, have been the driving force behind the market’s success.
Charting their dominance reveals a remarkable narrative: even the worst-performing stock among them has surged by 40%. However, their success comes at a price, as the average price-to-earnings ratio for these heavyweights stands at a lofty 41. Yet, this is no surprise, given their substantial contributions to the S&P 500’s gains.
Digging deeper into the data, it becomes evident that without the Magnificent Seven’s stellar performance, the S&P 500 would be essentially flat for the year. These tech giants, with their significant weightings in the index, wield considerable influence over its overall performance.
The disparity is stark when comparing the equal-weighted S&P 500, where every stock carries the same weight, with the market cap-weighted S&P 500. While the latter boasts a 14% increase, the former shows minimal gains.
Amidst the dominance of these giants, a different narrative unfolds for midcap and small cap stocks. The S&P MidCap 400 Index and the S&P SmallCap 600 Index are trading at 12.2 and 11.4 times forward earnings, respectively, making them notably inexpensive compared to historical trends. The SPDR Portfolio S&P 400 Mid Cap ETF and the SPDR Portfolio S&P 600 Small Cap ETF present intriguing opportunities, being potentially extremely undervalued.
As the year unfolds, investors navigate a market shaped by the contrasting performances of the Magnificent Seven and the resilience of smaller players, creating a nuanced investment landscape.
Sven Franssen