Why the Magnificent Seven of the US stock market may be less than magnificent

The Magnificent Seven of tech — Apple, Amazon, Alphabet, Microsoft, Nvidia, Meta and Tesla — have been dominating the financial world for the last 10 years with sales per share growth that rose from $294 in 2015 to $2,314 in 2023, gross margins of 53% and an EBITDA margin in the region of 30%.

As a result, the earnings per share of the Magnificent Seven have risen from $42.8 in 2015 to an estimated $441.2 at the end of 2023. This is what growth and having changed the world at breakneck speed has brought about, in a scenario where relaxed regulations and tax laxity have added to the conducive environment for these privileged companies whose raw material is YOU and your life, which they keep perfectly monitored.

The seven companies together have a weight in the S&P500 Index of 27.7%, the highest concentration in history. The exceptional performance of the American index compared to Europe over the last decade (11.6% annually vs. 6.8%) is due to these high-performing companies. As you can see, we are now just 2% away from surpassing the all-time highs of the Magnificent Seven and there seems to be no limit to the upside, despite the fact that they are trading in 2023 with a price-earnings ratio (P/E) of 32.5x, compared to 20.3x for the S&P500 Index.

This higher P/E may make sense because of the expected growth in the coming years, but there is also a possible trap in this growth: the market tends to extrapolate infinite growth to high digits, which may not come true. The 2028 consensus expects most of the Magnificent Seven to have dazzling profit increases (Nvidia 138%; Microsoft, 93.5%; Apple, 55%; Meta, 81.7%; Amazon, 140.5%; Tesla, 179.6% and Google, 108.2%). That is the reason why the market is willing to pay a higher P/E, but on the other hand, it can also be said that all the positive growth has been discounted in the price and none of the negative.

If you buy Magnificent Seven shares today, you are buying at a P/E of 17.3 times 2028′s stellar earnings. To make money at that date, you would have to hope to see above-average growth from 2028 to 2033 for it to trade above 17 times, since that P/E is the historical average of the S&P 500.

Be careful not to buy high-performing companies now, but at demanding prices and with all the upside discounted. I believe that, contrary to what most people think, it may be that the share prices of the Magnificent Seven will face a big sideways movement for the next few years, instead of continuing with a bullish rally that is disconnected from all the other sectors.

Alberto Espelosín is a manager at Renta 4 Alpha.

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