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Is the Magnificent Seven’s dazzling stretch of outperformance finally coming to an end?
One Wall Street veteran thinks so, and that investors need to pounce on the “generational buying opportunity” in unloved areas of the global stock market, which is to say, practically everything else.
Richard Bernstein, chief investment officer of Richard Bernstein Advisors, said in a recent investment outlook that unloved sectors of the global stock market could be poised to beat U.S. market leaders like Apple Inc.
AAPL,
and Nvidia Corp.
NVDA,
over the coming decade.
Bernstein compared the dynamic with the period between the bursting of the dot-com bubble in the early 2000s and the arrival of the 2007-2009 financial crisis, which saw the S&P 500 index and technology stocks lag while “underdog” areas of the market, including the energy patch and emerging-market equities, outperformed.
“Much like after the deflation of the Technology Bubble, investors could be facing another ‘lost decade in equities,’” Bernstein said in written commentary.
He is basing his view on the extreme valuation gap between the top performing U.S. megacap stocks and the rest of the market, illustrated in the chart below. As of late October, the seven most valuable U.S. publicly traded companies were more than twice as richly valued as much of the rest of the global equity market on a price-to-earnings basis.
RICHARD BERNSTEIN ADVISORS
“Profits and valuation, when combined with investors’’’ myopic views on the Magnificent Seven suggest a generational investment opportunity in the broader global equity markets,” Bernstein said.
The so-called “Magnificent Seven” is a group of seven megacap U.S. stocks that includes Apple, Microsoft Corp.
MSFT,
Google owner Alphabet Inc. (both Class A
GOOGL,
and Class C
GOOG,
shares are typically included), Amazon.com Inc.
AMZN,
Nvidia and Facebook and Instagram owner Meta Platforms Inc.
META,
The “Mag 7” is up more than 60% so far this year on a market-capitalization weighted basis, according to an analysis by MarketWatch using FactSet data. Dow Jones Market Data shows they have accounted for practically all of the S&P 500’s year-to-date advance, with their gains offsetting an aggregate year-to-date loss in the other 493 index members’ shares.
The rally in U.S. equities in 2023 has been characterized by a heavy dependence on the largest stocks, while much of the rest of the market has lagged, with small-caps still in the red year-to-date.
Following last week’s rally, the S&P 500 was up more than 13% on the year, FactSet data show. U.S. small and midcap stocks have lagged the S&P 500 and technology-heavy Nasdaq-100, the index that has benefited the most from the outperformance of the Mag 7.
Outside the U.S., emerging-market stocks have broadly unperformed despite pockets of strength, according to FactSet data.
To be sure, a broad index of global stocks has nearly kept pace with the S&P 500. The MSCI ACWI Index
ACWI,
which includes shares of nearly 3,000 companies from around the world, is up more than 10% on the year, per FactSet.
Yet an equal-weighted version of the S&P 500
XX:SP500EW. 45,
which incorporates the performance of each member stock equally instead of granting a heavier weight to more valuable companies, was down marginally on the year, but had been down more than 4% before last week’s rebound rally.
As U.S. stocks rallied toward their best week of 2023 last week, there were some signs that a rotation in performance anticipated by Bernstein might already be under way. For example, small-cap stocks outperformed the S&P 500
SPX,
Nasdaq Composite
COMP
and Dow Jones Industrial Average
DJIA,
an uncommon occurrence as of late.
The Russell 2000
RUT,
a popular small-cap index, rose more than 7% last week, its best weekly gain since 2021, according to Dow Jones Market Data.
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