'Magnificent Seven' market dominance 'not unique': Strategist

Tesla (TSLA), Microsoft (MSFT), Alphabet (GOOGL, GOOG), and Amazon (AMZN) -four of the "Magnificent Seven" - are gearing up to release their latest quarterly earnings this week. Much of Wall Street is eagerly awaiting these earnings, considering how much weight in the major indexes these stocks hold.

Goldman Sachs Global Chief Equity Strategist Peter Oppenheimer joins Yahoo Finance to give insight into the upcoming week of Big Tech earnings and puts the market dominance from these companies in a historical context, extrapolating what can be learned from the past.

Oppenheimer says Big Tech's dominance is "not unique historically. We've had the largest companies in the index of typically been somewhere between 5% and 20%. So if you went back to the 1960s, for example, the big car companies were as big in the index as the bigger technology companies are today."

He continues with: "One of the things I would say is very positive is that there have been times, on occasion, in the past when the biggest companies have been very expensive and they've really reflected hopes and expectations of future profits rather than current strong results...It's not unique to have the concentration or the size and scale of companies that we're seeing currently, but the rather good thing, I think, is that these companies are actually achieving very, very strong profitability. "

For more expert insight and the latest market action, click here to watch this full episode.

This post was written by Nicholas Jacobino

Video Transcript

- After the close, we will hear from Tesla. Will be the first of the so-called Mag Seven to report after the bell. The lot riding on big tech earnings. Let's bring in Peter Oppenheimer, Goldman Sachs Global Chief Equity Strategist joining us now. It's great to see you again. So just talk to us just about how important the Mag Seven earnings reports are for the market at this point, given the fact that many of these tech names really account for so much here when it comes to some of that concentration in the gains that we've seen.

PETER C. OPPENHEIMER: Yeah, absolutely. There's going to be huge focus, because they make up such a big slice of the market now. If you look at those companies together, they're around 30% of the S&P in terms of size or market capitalization. And they've also had a period of significant beats relative to expectations in recent quarters.

So although they're very, very large, that has really reflected very, very strong fundamentals over the last couple of years. And although we've seen the rising interest rates coming through since 2022, unlike some of the other growth sectors, which are less profitable and they have therefore been negatively affected by higher rates, because these companies have strong balance sheets and a lot of cash, they've actually been relatively immune. So I think the market is going to focus a lot on their results as a driver to where we go from here in the index.

- Peter, it's great to speak with you. I want to talk to you about this concentration a bit more, because profits for the Mag Seven are expected to rise 38%. If you take out NVIDIA, that number goes down to 23%. I know you are as much a historian as you are an equities guy. Talk to me about whether you've seen a time in history where one name has that big of an impact.

Well, it's not unique historically. We've had-- the largest companies in the index have typically been somewhere between 5% and 20%. So if you went back to the 1960s, for example, the big car companies were as big in the index as the bigger technology companies are today, in the early 1970s, the big oil companies were as dominant now as the tech companies are today.

So it's not unique. One of the things I would say that is very positive is that there have been times on occasion in the past when the biggest companies have been very expensive and they've really reflected hopes and expectations of future profits rather than current strong results.

You only have to go back, for example, to the late 1990s during the technology bubble when we had technology companies being the biggest stocks, but they had much higher valuations than those today because those prices were reflecting hopes of future strong profit growth rather than the achievement of strong profitability, which we're seeing with these dominant companies today.

So it's not unique to have the concentration or the size and scale of companies that we're seeing currently, but the rather good thing, I think, is that these companies are actually achieving very, very strong profitability.

- And I'm curious you mentioned innovations like the world wide web, of course, that makes me think about AI. I wonder to what extent you think that we can continue to use history as a gauge for the future given that AI could stand to change so much of the world around us, particularly, when it comes to just company efficiency in general.

PETER C. OPPENHEIMER: Well, absolutely. And I think this is one of the opportunities as it relates to AI. What the market is really doing at the moment is seeking out and really focusing on those companies at the epicenter of the technology. Who's really spending money on these large language models, for example. Who's got the scale to be able to afford the compute power to achieve these breakthroughs.

But as we found out from other ways of technology in the past, including the internet. Some of the biggest winners and market growers ultimately are not necessarily the companies that are doing the original innovation, but companies that can develop new products and services on the back of the technologies. Or indeed, companies in other sectors which, as you say, could become much more efficient as they adopt and utilize these technologies over time.

So I think this really comes back to the point about broadening. While the dominant companies are there for good reason, they're very strong, profitable, high growing companies. The gap of valuation between them and many other companies in the index is quite wide. And over time, as these technologies break through, you're going to get new opportunities emerging, new companies with great products and services, which grow at a very rapid rate, which are not really being focused on, and indeed companies in other sectors that could be a big beneficiary.

Think of health care, for example. Just speeding up the innovation of new drug discovery. These are where the opportunities, I think, are still really quite strong.