Market Musings 250524: Beware The Narrowing Of Mag 7 Performance

25th May by Edmund Shing

13 comments 2237 reads

Market Musings 250524: Beware the narrowing of Mag 7 performance

2024: So far, so good...

The year so far to May 23 has been a good one for global stocks around the world in general. The Euro STOXX 50, the benchmark index in Europe, has advanced 14% including dividends a year to date. The S&P 500 in the US is up 11.5%. Japan, if you look in dollar terms, is up 10%. And even the UK is not doing so badly with the FTSE 100 gaining 9.4% including dividends.

So, the year so far has been pretty healthy for investors in stocks, driven by a healthy level of global liquidity, decent earnings, robust outlooks and of course economic growth that has been pretty decent on a global basis led by the US, and in particular the US consumer.

No Longer the Magnificent 7, are we down to just the Dynamic Duo?

However, there are clouds on the horizon, if you look over the last 3 months at the performance of the so-called Magnificence 7, those groups of 7 mega-cap technology-related stocks that have performed very well, leading the world stock market for the last few years.

But today we are starting to see some fracturing of performance with out of these 7, only 2, namely Nvidia and Alphabet or Google, outperforming the average stock in the S&P 500 index. Over the last 3 months, the average stock in the S&P 500 index has gained 4.2% and only Alphabet and Nvidia have done better. They have admittedly performed far better better because they're both well into double digit returns over the last 3 months, but they're the only 2. The other 5, i.e. Apple, Meta, Amazon, Tesla and so on, have actually underperformed with both Meta and Tesla in particular falling over the last 3 months.

Source: tradingview.com

What are we to make of this? Well, I think we can argue that the bubble or the mania over Artificial Intelligence, this growth theme that has been such a pivotal driver for these Magnificence 7 stocks, I think it is cooling, I think related stock performance is narrowing, and while Nvidia continues to deliver blowout results, which of course continues to drive the stock price ever higher, bear in mind how big Nvidia's market cap is today.

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Stonethecrows

25th May

Thanks Edmund. I very insightful overview as ever. I remember you wrote that commodities would rise again last year I think and look at where we are now! Various metals testing the highs again this week. Cooper and gold look very strong .

Rusty2

Are they? Copper fell heavily on Wednesday due to falling demand, down about 5% on the week. Nickel was down around 8% also. Gold also fell heavily on Wednesday and Thursday.

CHULANI Gunasekera

27th May

Completely agree with you Edmund, one of the first lessons learnt as a Finance Executive not to put all eggs in one basket. It is a good to remind, with those examples, what happened during dotcom bubble. There was another player called Blackberry entered the market with a bang in 2003, they did well for about 4 years, until Apple released iPhone in 2007, the rest is history.

Mark Carter

28th May

"But today we are starting to see some fracturing of performance with out of these 7, only 2"

This is what Terry Smith had to say some time ago: "Bull markets do not broaden with age: they narrow. The current bull market began in 2009, when shares rose indiscriminately. After 2014 emerging markets stopped rising. Then the US took the lead. Then the technology sector in the US. Then just the big-hitting FAANGs. The idea that in the late stages of a bull market investors can make gains or protect themselves by switching into the stocks that have lagged flies in the face of history."

Lack of breadth is a warning sign that we are likely to be near the top of the bull market, at least for the US. Investors are concentrating on the shares that go up. That pool shrinks, and when that dries up, well, that marks the top.

The last couple of years have been interesting ones for the stock market, and I think will go down in history. People will look back in 10 years time and shake their heads in puzzlement. Cathie Wood is sure to get a mention along with NVDA, TSLA and a few others. I don't know where the top is, nobody does. It will be interesting to see if some random exogenous event precipitates a collapse.

Epitychia

29th May

Yes it is a bubble but bubbles can keep expanding for a long time. I guess it comes down to risk management and investment style. Some shares trade on a PER of 35 some on a PER of 8. Just be aware that people usually over pay for growth because it is exciting and under pay for boring because it is boring.

Wolf of Small Street

Timing is everything Epitychia as you say.

This was from an MP in 1720 after being bankrupted by the South Sea Bubble: “I said, indeed, that ruin must soon come upon us, but I own it came two months sooner than I expected.”

The bull market seems to be narrowing. I did dig up an interesting article the other day "200 Years of Market Concentration" https://globalfinancialdata.co... which readers might find interesting.

tl;dr The fact that so few companies make up such a large percentage of the index isn't all that unusual.

This was one of the few things I found which was an early warning of a coming correction, percentage of stocks above 200d moving av started to decline around April while the market rallied for another 8 months before rolling over.

Fire Juggler

Interesting call ! Canals/railways/ plastics/ computing... all revolutions last longer than you think (50years according to Carlota Perez ..) but eventually consolidate to just a few players (Broad gauge anyone? lycos? AOL? ) In the words of swedish philosphers Ulvaeus & Andersson - The winner takes it all. Nvidia might just be special. Good deep dive podcasts here at 'Acquired ' by Ben and David if you have a spare 3 hours https://open.spotify.com/episo...

Andrew Penney

I wonder how long Nvidia can have the market to themselves? They seem to have almost accidentally benefitted from their graphics chips also being ideal for AI processing. Presumably the other chip manufacturers will be designing their own GPUs and when they do, will prices and profit margins will reduce for Nvidia. Or will Nvidias market cap be able to maintain a big enough gap over the competition?

jonno

Nvidia, a brilliantly successful company but no stock goes up ad infinitum, which leads me to...

perhaps the most financially ruinous phrase in investing, if one is sufficiently naïve or delusional to believe it ; 'this time its different'. I don't think so!

NVIDIA (NSQ:NVDA) don't have the market to themselves. Advanced Micro Devices (NSQ:AMD) also make GPUs. AMD got a poor reputation from some users, over promising and under delivering, as in gaming. When l changed my computer l choose Nvidvia. The old GPUs are not up to running a lot of AI software. These GPUs are also being used in bitcoin mining. The costs of GPUs have increased considerably in the last few years.

As for the share price, it will go up if NVIDIA (NSQ:NVDA) keep beating the forecasts. The PE maybe quite high but the PEG is under 1. I think growth will start to slow soon as many will have upgraded their GPUs.

30th May

Plus ça change

Market Musings 250524: Beware the narrowing of Mag 7 performance