Several weeks ago, we decided to reconstruct the S&P 500 by excluding the Magnificent 7 stocks from the sectors in which they normally reside and by creating a new separate sector for them. The characteristics of the new group of stocks were even more surprising than we might have thought. Looked at in this way as of the end of the third quarter, these seven stocks would represent the Index’s largest “sector” at roughly 28% of the S&P 500, while representing only 17% of its earnings. (Financials would be a distant second at a mere 13%, 1500 basis points away, but represent more than 21% of the Index’s total earnings.) We also found that the Magnificent 7 represented nearly the entirety (~92%) of the S&P’s performance YTD. Not surprisingly, these companies are trading at much greater than market multiples. A look at expectations for their earnings and margins on the following pages, however, reveals why. This type of concentration is a major challenge for any portfolio manager trying to beat the broader S&P 500. A portfolio manager of a fund legally deemed to be “diversified” might legally be precluded from replicating the current weightings of the Index and thus be helpless in attempting to outperform it if the stocks continued to rise. With about 80% of earnings season complete two major features emerged: 1) this is the first quarter in four in which the S&P is posting a gain in year/year earnings growth; and 2) companies who miss earnings are being punished far more than companies who beat earnings are being rewarded to an unusually large extent. It appears that as rates rise, the stakes for all companies, but especially the Magnificent 7, seem to be going up.
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.
US STOCKS-Wall Street wavers after rally, focus on inflation data
Wall Street's three main stock indexes were making little progress in either direction on Monday as investors awaited a crucial inflation reading that could shape expectations around how long the U.S. Federal Reserve will keep interest rates elevated.
Focus: US retailers stuck with excess stock offer bargains as holiday season nears
As the holiday shopping season approaches, major U.S. retailers from Dollar General to Walmart and Macy's could be saddled with too much stock for a second straight year, according to a Reuters analysis, jeopardizing retailers' profit margins and generating steep discounts for shoppers.