In October 2023, we shared the CIG Asset Management Update: Year-to-Date U.S. Stock Performance in Pictures and we discussed how the Magnificent 7[i], seven mega-cap growth stocks, were driving the returns of the S&P 500.
This outperformance continued through year end as you can see in the December 31, 2023 FinViz heat map below.
Source: FinViz as of 12/31/2023
In the year, 2023, the Magnificent 7 stocks experienced an average return of +111% while the S&P 500 Index only gained +26%. The Equal-Weighted S&P 500 Index only gained +12%. If you removed the Magnificent 7 stocks from the Equal-Weighted S&P 500 Index, you would have only gained +8%. [ii]
The strong performance of the Magnificent 7 stocks has extended into 2024. As of February 29, 2024, these seven stocks have gained +12.7%, outpacing the S&P 500’s increase of +7.1% and the Equal-Weighted S&P 500 Index’s gain of +3.2%.[iii]
We believe the Magnificent 7 stocks are currently trading at levels considered expensive compared to historical standards. Torsten Slok, Apollo’s Chief Economist, has recently showed that when you compare the median 12-month forward price-to-earnings (PE) ratio of the top ten companies in the S&P 500, which include all of the Magnificent 7 stocks, they are much more expensive now than they were during the tech bubble of the 1990s. [iv]
Source:Bloomberg, Apollo Chief Economist. Note: Data as of January 31, 2024.
With that being said, we are seeing some encouraging signs that the stock market rally may finally be starting to broaden out. For the week ended 3/6/2024, we saw four of the Magnificent 7 stocks; Microsoft (MSFT), Apple (AAPL), Alphabet (GOOG), and Tesla (TSLA) move lower as many other stocks outside of the technology sector rose. You can see this in the March 6, 2024 FinViz heat-map below.
Source: FinViz as of 3/6/2024
While we find it encouraging to see a wider equity market participation, we still believe strongly in the value of diversification. Diversification is not supposed to maximize returns, it is designed to reduce investment risk. A diversified portfolio at times won’t keep up with the market when the bulk of returns are concentrated in a small group of stocks like the Magnificent 7. We strive to diversify our investments amongst industries and sectors, size (large-cap and small-cap), geography, growth versus value and alternative asset classes. Some of these investments are negatively correlated to the stock market – what that means is historically when the stock market traded lower – these investments gained in value. Past performance is not a guarantee of future results, but history helps guide us.
At CIG, we believe in risk-balanced investing. We believe investors should consider how much risk they are taking to achieve returns. We think that we should be striving to reach the return necessary to meet the various needs of our client’s financial plans while, at this point in the market cycle, taking as little risk as possible to meet that goal. We want you to sleep at night.
Please reach out to Brian Lasher (blasher@cigcapitaladvisors.com), Eric T. Pratt (epratt@cigcapitaladvisors.com) or the rest of the CIG team.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
