Is the Stock Market too Concentrated? Magnificent Seven Q3 2023 Update

Sean Sevey |
Categories
Market Commentary

As we gear up for the Q3 earnings season, the focus remains on the ‘Magnificent Seven’ stocks. NVIDIA (NVDA), Tesla (TSLA), Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL, GOOG), Meta (META), and Amazon (AMZN) have collectively outperformed the broader market by a wide margin this year.

A chart showing the 2023 performance of the Magnificent Seven Stocks vs Major Indices as of 9/29/2023

As a result of this significant outperformance and the market cap weighting of the S&P 500, these seven stocks now represent 29% of the total index.

This extreme short-term outperformance and the virality of these consumer-facing companies have created challenging environment for investors.

This blog post serves two purposes.

First, we provide several visuals to analyze the historical significance of concentrated leadership. Then, we’re providing an in-depth update on the “Magnificent Seven” to help you prepare for the Q3 2023 earnings season. 

Should You Buy the Top 10 Holdings of the S&P 500?

In 2000, General Electric (GE), Exxon (XOM), Pfizer (PFE), Citigroup (C), Cisco (CSCO), Wal-Mart (WMT), Microsoft, AIG (AIG), Merck (MRK), and Intel occupied 23.5% of the S&P 500. An equal 10% investment in this group would have significantly underperformed against the S&P 500 since then.

A chart showing the performance of the Top Ten Holdings of the S&P 500 in the 2000 vs the S&P 500

The Top 10 also went on to significantly underperform the S&P 500 In 2005, when General Electric, Exxon, Proctor & Gamble (PG), Citigroup, Bank of America (BAC), Wal-Mart, Microsoft, AIG, Johnson & Johnson (JNJ), and Pfizer comprised 20.4% of the S&P 500. 

A chart showing the performance of the Top Ten Holdings of the S&P 500 in the 2005 vs the S&P 500

These visuals spotlight a crucial takeaway: today’s headline-makers and top performers may not sustain their performance into the future. Outperforming and underperforming strategies often mean revert.

As shown in the chart below, over the last 40 years, Value and Growth stocks have each outperformed the other for periods of time. However, long-term average trailing returns are nearly equal.

In the lower panel, an increasingly positive spread indicates outperformance by Growth stocks, and a more negative spread indicates Value outperformance.

A chart showing Value vs Growth stocks over the past 40 years. In the lower panel, an increasingly positive spread indicates outperformance by Growth stocks, and a more negative spread indicates Value outperformance.

 

Magnificent Seven Q3 2023 Earnings Prep

Venturing into Q4, we’re examining the status of each member of the ‘Magnificent Seven’ heading into the Q3 2023 earnings season.

Click to jump to a specific section:

NVIDIA 

In 2023, the meteoric rise of Artificial Intelligence (AI) has cast NVIDIA as a pivotal player in the AI saga. CEO Jensen Huang declared at the end of Q2, “A new computing era has begun. Companies worldwide are transitioning from general-purpose to accelerated computing and generative AI.” 

After registering a staggering $13.51B in revenue last quarter, it’s clear the chip manufacturer isn’t merely participating in this technological renaissance but actively sculpting it.  

Despite experiencing a slight pullback in late August and September, NVIDIA’s stock ascended by an impressive 197% year-to-date as of September 29th.

A chart showing the 2023 performance of NVIDIA vs Major Indices as of 9/29/2023

NVIDIA’s innovation in AI is driven by several new chips getting widespread adoption, including the H100, which the company claims delivers nine times the performance of its predecessor and is essential in building Large language models (LLMs) like ChatGPT and BARD. Last quarter, NVIDIA also announced plans to ship an enhanced version of the GH200 Grace Hopper Superchip next year, combining the Grace CPU with the abovementioned H100 GPU, which, according to the company, can process specific AI tasks (specifically, running LLMs) 284 times faster.

Recognizing its potential, industry giants like Google Cloud, Meta, and Microsoft are among the early adopters of the DGX GH200, a supercomputer powered by 256 Grace Hopper Superchips that offers 144TB of shared memory for next-gen Gen AI language models.

Amid the thriving AI adoption, NVIDIA continues to guide businesses to enhanced AI integration. The company’s “three-chip strategy” is a cornerstone for enterprises building their AI models, underscored by the 171% YoY increase in NVIDIA’s data center revenue in Q2. Data center revenue accounts for over three-quarters of NVIDIA’s total revenue.