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Which would you rather own: The 1,000 small and mid-sized U.S. companies that make up the S&P 1000 index, or the so-called “Magnificent Seven” big tech giants?
Actually, it’s a trick question. At today’s prices, the Magnificent Seven aren’t really valued the same as those 1,000 stocks..
They’re valued at three times as much.
No, really. Add together the values of Apple
AAPL,
Amazon
AMZN,
Alphabet
GOOGL,
Meta Platforms
META,
Microsoft
MSFT,
Nvidia
NVDA,
and Tesla
TSLA,
at current stock market prices and you’re looking at $10.6 trillion.
Meanwhile, you can buy the entire S&P 1000
XX:SP1000
for just $3.4 trillion.
This is the context in which Goldman Sachs hails the news that the so-called Mag 7 are now at their cheapest in years.
In “relative terms,” naturally.
The so-called Mag 7 — the term was coined by TV’s Jim Cramer — have seen their p/e ratios fall by 20% in the last two months, Goldman’s strategy team notes.
That has slashed their stocks from 34 times forecast earnings at the start of August to a bargain basement 27 times today.
The S&P 1000? Er… 15 times.
Goldman points out that the Mag Seven look cheap compared to their “long-term earnings growth rate,” which Wall Street pegs at 20%.
That’s some long-term growth rate.
The long-term investment return of U.S. stocks has averaged around 5% a year plus inflation.
Imagine if the Mag 7 stocks grow at 20% a year, while the rest of the U.S. stock market performs as normally: Not just the 1,000 small and mid-cap companies mentioned above, but the other 493 big companies in the S&P 500.
By my math, within three years the Mag 7 would account for more than a third of the entire value of all U.S. listed companies. Within 7 years they would account for more than half.
That’s some forecast.
Possible? Sure. The question is how likely it is, and what are the risks.
Microsoft stock currently trades at ten times the next twelve months’ expected sales. Forget earnings. For Nvidia, the chipmaker enjoying big AI-related demand, the figure is 14 times.
As Sun Microsystems’ CEO Scott McNeely famously asked of investors who paid such prices in the past: “What were you thinking?”
Maybe I’m just being ornery. But I’d rather buy 1,000 companies three times over than seven glamor stocks that currently have everyone excited.
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