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This group has made the S&P 500 more concentrated than ever, which means this key U.S. equity gauge’s further boom or doom depends on these seven stars. " The S&P 500 a market cap-weighted index comprised of 500 time-tested companies, a few of which have multiple classes of shares, per Motley Fool.
A Quarter of S&P 500 Invested on Magnificent Seven
At the current level, S&P 500 ETF – SPDR S&P 500 ETF Trust (SPY - Free Report) – invests more than 26% in Magnificent Seven stocks. In the first half of 2023, the S&P 500 was up about 16.4% mainly due to the big tech rally. The expectations of a less-hawkish Fed, which actually turned out to be case, has facilitated a super tech rally in 1H of 2023.
But with the chances of a higher-for-longer interest rates in the United States has bode ill for the tech space with SPY falling about 3% so far in the second half of 2023. Many consider the over-reliance on the Magnificent Seven has made the S&P 500 a susceptible equity gauge.
Then why The Magnificent Seven Are Getting so much of importance? Let’s find out.
Magnificent Seven: S&P 500’s Real Profit Earners
The S&P 500 is up about 12.8% this year (as of Oct 18, 2023) while Invesco S&P 500 Equal Weight ETF (RSP) is off about 0.5% this year. The difference clearly explains the Magnificent Seven’s charisma in the investing world.
Inside the Winning Attributes of Magnificent Seven
Apple dominates over half of the U.S. smartphone market. Plus, the Services portfolio that includes revenues from cloud services, App store, Apple Music, AppleCare, Apple Pay, and licensing and other services now became the cash cow.
Microsoft dominates the PC software market with more than 73% of the market share for desktop operating systems. The company’s Microsoft 365 application suite is one of the most popular productivity software globally. It is also one of the prominent public cloud providers.
Alphabet's Google has consistently held around 90% of the global monthly internet search share for around a decade. Advertisements, maps, software applications, mobile operating systems, consumer content, enterprise solutions, commerce and hardware products of it are also notable.
Amazon holds a commanding lead in U.S. online retail sales, being over five times ahead of its nearest rival. Amazon also enjoys dominant position in the cloud-computing market, particularly in the Infrastructure as a Service (IaaS) space, thanks to Amazon Web Services (AWS), which is one of its high-margin generating businesses.
Nvidia is at the forefront of the AI boom. A significant 90% of GPUs used in AI-powered data centers come from Nvidia.
Meta Platforms is the world’s largest social media platform. The company’s portfolio offering evolved from a single Facebook app to multiple apps like photo and video sharing app Instagram and WhatsApp messaging app. Along with in-house developed Messenger, these apps now form Meta’s family of products used by almost 3.88 billion people on a monthly basis as of Jun 30, 2023.
Tesla is the market leader in battery-powered electric car sales in the United States, with roughly 70% market share. Over the years, Tesla has shifted from developing niche products for affluent buyers to making more affordable EVs for the masses.
Inside the Valuation of Magnificent Seven
Meta’s P/E (ttm) is 30.16X, lower than Computer Software-Services Market’s P/E of 36.47X. Alphabet’s P/E (ttm) is 29.51X, lower than the concerned industry Computer Software-Services Market’s P/E. Microsoft’s P/E (ttm) is 33.65X, lower than the concerned industry Computer Software-Services Market’s P/E. Apple’s P/E (ttm) stands at 29.55X, in line with Computer-Office Equipment Market’s P/E of 28.24X.
However, Amazon, Tesla and Nvidia are pricey.Amazon’s P/E (ttm) is 94.91X, lower than Nonfood Retail-Wholesale market’s P/E of 26.97X. Tesla’s P/E (ttm) 68.75X is way higher than the concerned industry Autos-Tires-Trucks market’s P/E of 23.13X. Nvidia’s P/E (ttm) 96.56X is also much higher than the concerned industry Electronics-Semiconductors market’s P/E of 41.04X.
Risks to “Magnificent Seven” Investing
Big Tech grapples with three regulatory hurdles: Privacy, content oversight, and antitrust scrutiny. These tech giants face challenges in safeguarding user privacy, moderating content, and addressing potential antitrust actions. Big Tech companies are currently under intense antitrust scrutiny, with regulators and lawmakers closely examining their market dominance and potential anti-competitive practices
Meanwhile, privacy, a complex issue with numerous trade-offs, is progressing slowly on the legislative front. Companies are taking active self-regulatory measures, which can have a more disruptive impact on the industry than government regulations.
Content oversight of Big Tech companies involves the monitoring user-generated content on their platforms, which is a big task given billions of users posting numerous content every day. Plus, government regulations can also go against the big tech companies’ revenues.
ETFs in Focus
Since some of the stocks look overvalued, investors may turn to the ETF approach as the basket form lowers the company-specific risks.
The fund measures the cap-weighted performance of 50 of the largest companies on the S&P 500 Index. It holds 55 stocks in its basket and "Magnificent Seven" accounts for a combined 49.2% share.
Vanguard Mega Cap Growth ETF tracks the CRSP US Mega Cap Growth Index. It holds 88 securities in its basket, with "Magnificent Seven" collectively accounting for 56.6% of the total assets.
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Guide to the Magnificent Seven Stocks & ETFs Investing
The "Magnificent Seven" typically refers to the 1960 Western film, but today’s stock market investors recognize the term as the set of seven big tech stocks, namely Apple (AAPL - Free Report) , Microsoft (MSFT - Free Report) , Alphabet (GOOGL - Free Report) , Amazon (AMZN - Free Report) , Nvidia (NVDA - Free Report) , Meta Platforms (META - Free Report) and Tesla (TSLA - Free Report) .
This group has made the S&P 500 more concentrated than ever, which means this key U.S. equity gauge’s further boom or doom depends on these seven stars. " The S&P 500 a market cap-weighted index comprised of 500 time-tested companies, a few of which have multiple classes of shares, per Motley Fool.
A Quarter of S&P 500 Invested on Magnificent Seven
At the current level, S&P 500 ETF – SPDR S&P 500 ETF Trust (SPY - Free Report) – invests more than 26% in Magnificent Seven stocks. In the first half of 2023, the S&P 500 was up about 16.4% mainly due to the big tech rally. The expectations of a less-hawkish Fed, which actually turned out to be case, has facilitated a super tech rally in 1H of 2023.
But with the chances of a higher-for-longer interest rates in the United States has bode ill for the tech space with SPY falling about 3% so far in the second half of 2023. Many consider the over-reliance on the Magnificent Seven has made the S&P 500 a susceptible equity gauge.
Then why The Magnificent Seven Are Getting so much of importance? Let’s find out.
Magnificent Seven: S&P 500’s Real Profit Earners
The S&P 500 is up about 12.8% this year (as of Oct 18, 2023) while Invesco S&P 500 Equal Weight ETF (RSP) is off about 0.5% this year. The difference clearly explains the Magnificent Seven’s charisma in the investing world.
Inside the Winning Attributes of Magnificent Seven
Apple dominates over half of the U.S. smartphone market. Plus, the Services portfolio that includes revenues from cloud services, App store, Apple Music, AppleCare, Apple Pay, and licensing and other services now became the cash cow.
Microsoft dominates the PC software market with more than 73% of the market share for desktop operating systems. The company’s Microsoft 365 application suite is one of the most popular productivity software globally. It is also one of the prominent public cloud providers.
Alphabet's Google has consistently held around 90% of the global monthly internet search share for around a decade. Advertisements, maps, software applications, mobile operating systems, consumer content, enterprise solutions, commerce and hardware products of it are also notable.
Amazon holds a commanding lead in U.S. online retail sales, being over five times ahead of its nearest rival. Amazon also enjoys dominant position in the cloud-computing market, particularly in the Infrastructure as a Service (IaaS) space, thanks to Amazon Web Services (AWS), which is one of its high-margin generating businesses.
Nvidia is at the forefront of the AI boom. A significant 90% of GPUs used in AI-powered data centers come from Nvidia.
Meta Platforms is the world’s largest social media platform. The company’s portfolio offering evolved from a single Facebook app to multiple apps like photo and video sharing app Instagram and WhatsApp messaging app. Along with in-house developed Messenger, these apps now form Meta’s family of products used by almost 3.88 billion people on a monthly basis as of Jun 30, 2023.
Tesla is the market leader in battery-powered electric car sales in the United States, with roughly 70% market share. Over the years, Tesla has shifted from developing niche products for affluent buyers to making more affordable EVs for the masses.
Inside the Valuation of Magnificent Seven
Meta’s P/E (ttm) is 30.16X, lower than Computer Software-Services Market’s P/E of 36.47X. Alphabet’s P/E (ttm) is 29.51X, lower than the concerned industry Computer Software-Services Market’s P/E. Microsoft’s P/E (ttm) is 33.65X, lower than the concerned industry Computer Software-Services Market’s P/E. Apple’s P/E (ttm) stands at 29.55X, in line with Computer-Office Equipment Market’s P/E of 28.24X.
However, Amazon, Tesla and Nvidia are pricey.Amazon’s P/E (ttm) is 94.91X, lower than Nonfood Retail-Wholesale market’s P/E of 26.97X. Tesla’s P/E (ttm) 68.75X is way higher than the concerned industry Autos-Tires-Trucks market’s P/E of 23.13X. Nvidia’s P/E (ttm) 96.56X is also much higher than the concerned industry Electronics-Semiconductors market’s P/E of 41.04X.
Risks to “Magnificent Seven” Investing
Big Tech grapples with three regulatory hurdles: Privacy, content oversight, and antitrust scrutiny. These tech giants face challenges in safeguarding user privacy, moderating content, and addressing potential antitrust actions. Big Tech companies are currently under intense antitrust scrutiny, with regulators and lawmakers closely examining their market dominance and potential anti-competitive practices
Meanwhile, privacy, a complex issue with numerous trade-offs, is progressing slowly on the legislative front. Companies are taking active self-regulatory measures, which can have a more disruptive impact on the industry than government regulations.
Content oversight of Big Tech companies involves the monitoring user-generated content on their platforms, which is a big task given billions of users posting numerous content every day. Plus, government regulations can also go against the big tech companies’ revenues.
ETFs in Focus
Since some of the stocks look overvalued, investors may turn to the ETF approach as the basket form lowers the company-specific risks.
Roundhill BIG Tech ETF
It is a pureplay ETF on “Magnificent Seven.”
Invesco S&P 500 Top 50 ETF (XLG)
The fund measures the cap-weighted performance of 50 of the largest companies on the S&P 500 Index. It holds 55 stocks in its basket and "Magnificent Seven" accounts for a combined 49.2% share.
iShares S&P 100 ETF (OEF - Free Report)
iShares S&P 100 ETF offers exposure to 101 largest U.S. companies. "Magnificent Seven" accounts for a combined 41.1% share.
Vanguard Mega Cap Growth ETF (MGK - Free Report)
Vanguard Mega Cap Growth ETF tracks the CRSP US Mega Cap Growth Index. It holds 88 securities in its basket, with "Magnificent Seven" collectively accounting for 56.6% of the total assets.