With five out of the ‘magnificent seven’ companies in the S&P 500 reporting earnings this week, Rachel Winter, Partner at Killik and Co, looks at why these stocks performed so strongly last year.
Not including dividends, the S&P 500 index gained 19% in 2023. The Magnificent Seven – Apple, Alphabet, Microsoft, Amazon, Meta, Tesla and Nvidia – gained an impressive 70%. Had these seven stocks been removed from the S&P 500, the index would have gained just 5%.
The majority of the seven stand to benefit from the rise of artificial intelligence, and the excitement about this trend was a big contributor to the strong share price performances in 2023.
A key measure of how expensive a share is the price/earnings ratio, which divides a share price by a company’s profit. If a share price has risen but the company’s profits (earnings) have risen too, then the share may not necessarily have become more expensive. For example, Microsoft shares rose between September 2021 and September 2023, but the price/earnings ratio dropped because the earnings increased.
The fact that so much growth came from such a small pool of stocks does present some challenges when it comes to benchmarking the performance of portfolios. Many investors will use the S&P 500 as a benchmark for their equity portfolios, but their performances will likely have been quite different from the index if they were missing some or all of the Magnificent Seven.
While artificial intelligence continues to be an exciting and promising theme as we move into 2024, it is important to ensure that portfolios are well diversified across a variety of sectors. Some sectors of the market are still trading below their 2021 peaks and may therefore present some attractive opportunities for investors. Examples include healthcare and consumer staples.
