Yahoo Finance Nifty Fifty provides clues on fate of the Magnificent Seven — spoiler, it doesn't end well
By Marius Jongstra
The intense market concentration among the Magnificent Seven names is highly reminiscent of the Nifty Fifty era — the classic “buy and hold” stock market period of the 1960s. These were real companies with real investment themes behind them, but investor sentiment turned to euphoria and fuelled prices and valuations into bubble territory beyond what the fundamentals justified. That ultimately ended in ruin, with the market plunging by 60 per cent collectively from 1973 to 1975.
What we know from that period, and is comparable to today, is that when a small group of megacap companies are driving the market, we must remember Bob Farrell’s Rule No. 7: “Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.”
The significance of the Magnificent Seven is well known, having recently driven the S&P 500 to record highs, accounting for 27 per cent of the total market cap and more than 100 per cent of all earnings growth last year. These statistics are increasingly becoming common knowledge among investors, and yet money is seemingly flowing into these names indiscriminately. Indeed, the latest Bank of America Corp. Global Fund Manager Survey showed this to be the most “crowded” trade around.
Allocation to the technology sector overall is at the highest since August 2020. The group has jumped 10 per cent year to date (on top of the 100 per cent climb in 2023). To give even more context to size, Meta Platforms Inc. added a whopping US$200 billion in market cap after its blowout earnings report (almost the size of McDonald’s Corp.) in a day. At nearly US$12 trillion in market cap (Apple Inc., Amazon.com Inc., Alphabet Inc., Nvidia Corp., Tesla Inc., Meta and Microsoft Corp.), these seven stocks are almost as big as the Euro Stoxx 600 combined.
The list goes on … no one is denying that these are great companies, but saying they are expensive is an understatement. This issue of concentration is not something new. Since the 1980s, the number of publicly listed companies has dropped, with an increase in M&A activity and private equity, while the average market cap has increased, thinning out the pool of competitors in the U.S. market. The market is highly dependent on the performance of a very narrow base of companies. We’ve seen this before and it doesn’t end well.
The last time was during the 2000 dot-com bubble. However, if one compares today to back then, the response is typically: “But these companies today make money.” Well, what if we go back to the Nifty Fifty days back in the 1960s? This infamous group of 50 companies were considered strategic “buy and hold forever” picks before their crash in 1973 and ensuing abysmal performance.
Many of these companies had valuations similar to what we’re seeing for the Magnificent Seven today, north of 40x trailing P/E. In the subsequent 10-year period, annualized total returns for the most expensive of these stocks (between 46x and 86x P/E) were between minus seven per cent and plus two per cent.
Moreover, something stands out about the composition of companies: a large share of them were focused on consumer goods (McDonald’s, Coca-Cola Co./PepsiCo Inc., Procter & Gamble Co.), while many of the “Nifty” technology companies didn’t survive over the longer term (Polaroid Corp., Digital Equipment Corp., Burroughs Corp.).
We saw the same thing in the dotcom era. The technology might have staying power, but that does not guarantee the survival of the company (think Netscape Communications Corp.). This is just human nature being played out in real time.
What is happening with the Magnificent seven is the same as what happened with the Nifty Fifty: investors prone to hype will over-extrapolate, lose their discipline and resolve, and give in to the temptation to join the herd.
Which asset classes are priced most (and least) for a hard landing?
Investors better hope the blasts from the past don't rock them
Valuations are not a timing tool, so time will tell when the bubble will ultimately pop on the Magnificent Seven. In the meantime, we continue to recommend diversifying away from the overvalued and increasingly narrowly-based U.S. equity market, or seek value beneath the surface. Price does matter — great companies do not equate to great stocks.
Marius Jongstra is vice-president of market strategy at independent research firm Rosenberg Research & Associates Inc., founded by David Rosenberg. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website.
