With Record-High Holdings By Institutions，What Is Next For The Magnificent Seven?

The massive outperformance of mega-cap technology stocks has been a defining feature of the equity market in 2023.The so-called “Magnificent Seven” (Apple, Microsoft, Google, Amazon, Nvidia, Meta, Tesla) now comprise 29% of S&P 500 market cap and collectively have returned 71% YTD in 2023 according to GS Global Investment Research. The remaining 493 stocks in the index have returned just 6%. As a result, the top 7 stocks have accounted for 76% of the S&P 500 index’s 19% YTD return.

Based on the holdings of active long-only funds through the end of September, 90% of funds hold Microsoft stock.Apple and Amazon were both held by more than 70%. This was followed by Alphabet, Meta and Nvidia which are held by more than 60% of funds, while Tesla was held by 40% of funds.

In fact, when looking at long-only funds relative to the S&P weighting, Apple and Tesla are the only ones among the Magnificent Seven with an underweight position.

According to GS Prime Services data, at the start of 2023 US single stock hedge fund net exposures to the mega-cap tech stocks ranked in just the 12th percentile compared to historical data compiled since 2016. However, as of today, these positions now rank in the 99th percentile.

Consensus expects the Magnificent 7 will continue to deliver faster growth than the rest of the index.Analyst estimates show the mega-cap tech companies growing sales at a CAGR of 11% through 2025 compared with just 3% for the rest of the S&P 500. The net margins of the Magnificent 7 are twice the margins of the rest of the index, and consensus expects this gap will persist through 2025.

From a valuation perspective, the Magnificent 7 trade at a large P/E premium vs. the rest of the market, but relative valuations stand in line with recent averages after accounting for expected growth.The Magnificent 7 trades at a P/E of 29x, which is 1.5 times the 19x P/E multiple of the S&P 500 stock.However, on an earnings-weighted basis, the Magnificent 7 long-term expected EPS growth is 8 pp faster than the median S&P 500 stock (+17% vs. +9%). On a PEG ratio basis, the relative valuations are in line with the 10-year average.

The record high holdings in “Magnificent Seven” shows that institutions may have no room to increase their positions.And the elevated hedge fund ownership also represents a risk to the Magnificent Seven.

In addition, the emergence of ChatGPT, and AI more broadly, benefited the largest stocks who were either directly or indirectly involved in the development of the technology. However, the frequency of AI mentions in earnings transcripts declined during the 3Q earnings season after surging earlier in 2023.

Likewise, Google search volumes for AI rose sharply in early 2023 but appear to have stabilized in recent weeks.

Source: Goldman Sachs, Bank of America, MarketWatch