Magnificent Seven vs. S&P 1000: A Tale of Valuations

When faced with the choice between the 1,000 small and mid-sized U.S. companies making up the S&P 1000 index or the renowned “Magnificent Seven” big tech giants, one might think it’s a simple decision. However, the reality is far more intriguing.

In terms of valuation alone, the Magnificent Seven surpass the combined worth of those 1,000 stocks by a staggering threefold. At present stock market prices, Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA) command an impressive $10.6 trillion, while the entire S&P 1000 currently stands at $3.4 trillion.

These figures lay the foundation for Goldman Sachs’ recent celebration of the fact that the Mag 7 are now offering their cheapest prices in years, although this claim must be understood within a relative context.

According to Goldman’s strategy team, the Mag Seven, a term popularized by TV personality Jim Cramer, have seen their price-to-earnings (p/e) ratios decline by 20% over the past two months. This drop has brought their p/e ratios down from 34 times forecast earnings at the start of August to a highly attractive 27 times today. On the other hand, the S&P 1000 boasts a p/e ratio of 15 times.

Goldman further highlights that when considering the “long-term earnings growth rate,” which Wall Street estimates at 20%, the Mag Seven appear undervalued in comparison.

In conclusion, despite their towering presence and influence, the Magnificent Seven are currently displaying favorable valuations when examined relative to various factors such as p/e ratios and earnings growth rates. Perhaps it’s time to reconsider where true value lies in the realm of investments.

The Power of Long-term Growth

The United States stock market has seen a consistent long-term investment return of around 5% per year, accounting for inflation. However, what if there are certain stocks that outperform the market and show an impressive growth rate?

Let’s consider the “Mag 7” stocks which have the potential to grow at an incredible rate of 20% annually, while the rest of the U.S. stock market performs as usual. This includes not only the 1,000 small and mid-cap companies mentioned above but also the other 493 big companies in the S&P 500.

Now, let’s do some calculations. According to my analysis, within just three years, these Mag 7 stocks would contribute to more than a third of the total value of all U.S. listed companies. Remarkably, within 7 years, they would account for more than half!

This forecast may seem remarkable, but the questions that arise are: How likely is this scenario, and what are the potential risks involved?

To gain some perspective, let’s consider the stock prices of Microsoft and Nvidia. Presently, Microsoft stock trades at ten times the expected sales for the next twelve months. On the other hand, Nvidia, a chipmaker experiencing increased demand due to AI-related advancements, trades at 14 times its sales.

This brings to mind a question posed by Scott McNeely, the CEO of Sun Microsystems: “What were you thinking?” In reference to investors who paid such inflated prices in the past.

Maybe I’m just being a bit skeptical, but given the choice, I would personally opt to invest in 1,000 different companies three times over instead of solely relying on seven popular and hyped-up stocks.

Remember, the key lies in long-term growth and diversification rather than solely focusing on a handful of glamorous stocks that may currently capture everyone’s attention.