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The S&P 500 (^GSPC) has never been this top-heavy.
The “Magnificent Seven” tech stocks — Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and Nvidia (NVDA) — make up 29% of the S&P 500’s market cap.
And a chart in Goldman Sachs’ 2024 US Equity Outlook shows that’s the largest portion of S&P 500 market cap ever dominated by just seven stocks.
That perspective helps explain a second chart from Goldman that shows the Magnificent Seven have gained 71% while the other 493 stocks have added just 6%. Given the benchmark’s market cap distribution, which allows larger stocks to contribute more to the index’s movements, the S&P 500 has added about 19% this year.
Goldman Sachs’ equity research team led by chief US equity strategist David Kostin described the Magnificent Seven’s outperformance as a “defining feature of the equity market in 2023.” And perhaps rightfully so.
Two other charts included in Goldman’s outlook show how the Magnificent Seven have outperformed the other 493 stocks in key metrics that typically drive stock performance.
From 2013 to 2019, the Magnificent Seven stocks grew at a compound annual growth rate of 15% compared to a 2% growth rate from the rest of the pack. That margin narrowed in the past two years to 18% and 15% respectively, but Goldman sees it widening again in the coming years. From 2023 to 2025, Goldman sees the Magnificent Seven growing at a compound annual growth rate of 11% compared to a 3% rate for the rest of the S&P 500.
The Magnificent Seven’s net profit margin also outperforms, where its 19% margins are above the 9.8% for the rest of the companies. Not to mention, the long-term earnings per share growth expectations are 17% for the Seven while that number sits at 9% for the other companies in the index.
“From a fundamental perspective, in recent years the trajectory of earnings has explained the performance of the Magnificent 7 relative to the rest of the market,” Kostin wrote. “The outperformance of the Magnificent 7 this year has coincided with a rebound in margins and earnings that has outpaced the weakness across the rest of the market.”
He added: “Consensus expects the Magnificent 7 will continue to deliver faster growth than the rest of the index.”
Goldman sees the path forward for the Magnificent Seven stocks to likely be higher, too, but that doesn’t make it the ideal trade for 2024 given the group’s rise over the last year.
“The 7 stocks have faster expected sales growth, higher margins, a greater re-investment ratio, and stronger balance sheets than the other 493 stocks and trade at a relative valuation in line with recent averages after accounting for expected growth,” Kostin wrote. “However, the risk/reward profile of this trade is not especially attractive given elevated expectations.”
Josh Schafer is a reporter for Yahoo Finance.
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