The formidable league of the United States’ most colossal technology entities, known as The Magnificent Seven, has reached a market capitalisation of $13 trillion (€12.04 trillion), a figure that strikingly matches the aggregate gross domestic products (GDPs) of Europe’s four largest economies: Germany, the United Kingdom, France, and Italy.
Such a comparison not only highlights their financial clout but also raises the question of whether this valuation is rational - or if we are witnessing a new economic reality.
Bank of America's chief investment strategist, Michael Hartnett, has added a layer to this narrative by noting that the combined market cap of the Magnificent Seven now also exceeds the aggregate GDP of major global cities like New York, Tokyo, Los Angeles, London, Paris, Seoul, Chicago, San Francisco, Osaka, Dallas and Shanghai.
This group—Microsoft, Apple, Alphabet, Amazon, Nvidia, Meta, and Tesla—now accounts for nearly one-third of the S&P 500 Index, a concentration that conjures memories of the dot-com era and sparks intense debate over the future of market equilibrium.
Over the past year, The Magnificent Seven have exhibited an 80% positive performance in an equal-weight index. In comparison, the equal-weight S&P 500 index, as tracked by the Invesco S&P 500 Equal Weight ETF, is up by only 4%.
A recent JP Morgan analysis showed a marked increase in the top 10 stocks' share of the MSCI USA Index to a substantial 29.3% in December 2023, a stone's throw away from the historical high of 33.2% seen during the dot-com bubble's peak.
Nevertheless, amidst this backdrop of towering market influence, a fundamental question arises: Are these valuations reaching for the stars, or are they firmly grounded?
Magnificent Seven: Are valuations getting irrational?
In a recent interview with Bloomberg, seasoned investor Ed Yardeni, CEO of Yardeni Research, observed that there are similarities with the market concentration reached during the dot-com bubble era. However, one of the key differences is that the Magnificent Seven have strong earnings.
Collectively, they have generated nearly $1.8 trillion (€1.67 trillion) in revenue over the past twelve months, maintaining an impressive average annual revenue growth rate of 23% over the past decade.
Traditional stock valuation metrics may suggest that the Magnificent Seven’s market performance is less worrisome than one would presume.
The median price-to-earnings (P/E) ratio based on reported earnings for the last 12 months stands at 36, and 33 when looking forward to the next 12 months. Although these figures may trigger a sense of déjà vu of the early 2000s' bubble valuations, they are still a far cry from the Nasdaq-100’s then-ratio of over 100 times its earnings.
This rationalisation suggests that the current market valuations of 'The Magnificent Seven,' while lofty, may not be as detached from economic reality as one might presume.
Overall, they seem to reflect the staggering demand and profitability that these American technology giants have harnessed in recent years.
Europe's largest tech company, ASML Holding N.V., is valued at $345 billion (€319.44 billion), a fraction of Microsoft's monumental $3 trillion (€2.78 trillion) market cap. Collectively, the seven largest European tech stocks do not even surpass the $1 trillion (€0.93 trillion) threshold, starkly underscoring the United States' supremacy in the tech domain.
The Magnificent Seven: A balancing act is needed
In conclusion, as we observe the ramifications of these market dynamics, it is essential to balance the dual aspects of the Magnificent Seven's rapid ascent—acknowledging both its advantages and potential risks.
On one hand, these valuations are lauded as a testament to American corporate success and innovation in high-growth sectors like artificial intelligence, semiconductors, EVs and social media platforms.
On the other hand, there are warnings about the dangers of such market dominance, including the suppression of competition and the potential for creating economic imbalances.
One certainty prevails: The financial saga of the Magnificent Seven is still unfolding, and its trajectory is hidden within the interplay of market dynamics and the relentless march of technological progress.
