Tech move over

 

Apple, Nvidia, and the Rest of Big Tech Have Been Winners. Now It’s Time for the S&P 500’s Other 493 Stocks.

It’s a lopsided world. Stock markets are a seesaw with the so-called Magnificent Seven on one side and everything else on the other side. That presents a “once in a generation opportunity” in everything except those companies, says Richard Bernstein Advisors.

The seven big tech firms—Apple (ticker: AAPL), Amazon.com (AMZN), Google parent Alphabet (GOOGL), Facebook parent Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA)—have played an outsize role in this year’s stock market rally. The S&P 500 (SPX) has delivered total returns of more than 13% this year, but If you remove the shares of the seven, the index is about flat.

Most investors favor the high side of the seesaw with the seven stocks, RBA said in a recent note. The firm’s portfolios, however, “are squarely positioned” on the other side.

“People like the seven stocks simply because the stocks are going up, not that there’s any fundamental reason behind them,” Richard Bernstein, RBA’s CEO and chief investment officer, told Barron’s. “That says that there’s got to be opportunities elsewhere.”

He said people laugh when he quips that he likes everything that’s not the Magnificent Seven, adding: “That’s not quite true, but it’s not that far off.”

Bernstein said the firm’s research shows that narrow markets are economically justified when growth is scarce, such as during a profits recession, because investors gravitate toward the fewer companies that can produce substantial growth. The narrow leadership of the Magnificent Seven could be justified if growth was very scarce. The problem is that it isn’t.

In fact, corporate profits are accelerating and the overall economy looks set to remain quite healthy, according to RBA, which manages more than $15 billion using global macro-based strategies and investing primarily in exchange-traded funds. 

Its ETF strategies are available at several of the larger broker-dealer platforms and aren’t sold directly to retail investors.

RBA screened U.S. companies for those with earnings growth of 25% or more. More than 130 companies passed the screen, but only one was from the group of Magnificent Seven and ranked 111th. 

That suggests “there is nothing particularly magnificent about the Magnificent Seven,” the firm said. “Such narrow leadership seems totally unjustified and their extreme valuations suggest a once-in-a-generation opportunity in virtually anything other than those seven stocks.”

The Magnificent Seven are trading at an average price-to-earnings ratio of 41, compared with the equal-weighted S&P 500’s P/E of 15, according to RBA.

“There have been many studies that show long-term returns are a function of valuation,” said Bernstein. “I always point out to people, it’s probably not a good idea to go through life paying Bentley prices for Volkswagens.”