The "Magnificent 7" is considered the world's second largest stock market in terms of scale! By 2024, they may still hold the "C position" in the US stock market.

Zhitong App has learned from a recent investment research report by Deutsche Bank that the so-called "Magnificent 7" of US tech giants now possess financial strength that surpasses almost all other major countries in the world. The total market value of just these seven tech giants could make them the second-largest national-level stock exchange globally. The Magnificent 7 in the US stock market include Apple, Microsoft, Alphabet-C, Tesla, Nvidia, Amazon, and Meta Platforms.

Analysts at Deutsche Bank stated in a recent research report released last week that the rapid growth in overall profits and market value of the "Magnificent 7" in the US stock market has exceeded the total market value of all listed companies in G20 countries outside the US. In terms of overall profits, the combined profits of A-share and Japanese stock market listed companies can only compete with the seven tech giants.

Deutsche Bank analysts emphasized that the current total market value of just the "Magnificent 7" in the US stock market would make them the second-largest stock exchange globally, far surpassing the second-ranked Chinese A-share market and being twice the total market value of the fourth-ranked Japanese stock market. They also mentioned that the total market value of Microsoft (MSFT.US) and Apple (AAPL.US) individually is equivalent to the total market value of listed companies in France, Saudi Arabia, and the UK.

However, this exaggerated level of concentration in the "dominant market" has raised concerns among some financial analysts, including those at Deutsche Bank, about the high weighting of the "Magnificent 7" in the US stock market and global benchmark stock indices.

Jim Reid, Director of Global Economics and Special Research at Deutsche Bank, warned in a follow-up report last week that the US stock market is "as concentrated in terms of weight as it was in 2000 and 1929."

This report from Deutsche Bank comprehensively analyzed the market value and profit development trajectory of a total of 36 large companies that have entered the top five in market value in the S&P 500 index since the mid-1960s.

Jim Reid pointed out that although most large companies eventually fall out of the top five in market value rankings due to changing investment trends and profit prospects, 20 of the 36 companies that have entered the top five in market value rankings are still among the top 50 in market value today.

"Among the companies currently in the top 5 of the US tech giants, Microsoft, which is considered a global leader in the AI field, has been in the top five in market value rankings since 1997, except for four months. Apple has been present since December 2009, Alphabet-C's parent company Alphabet has been present since August 2012, except for two brief exits, and Amazon has been present since January 2017."The latest entrant is the AI chip giant NVIDIA (NVDA.US), which has been among the top five in market value since the first half of last year," Reed said.

In the fiscal year 2021/2022, Tesla (TSLA.US), the global leader in electric vehicles, has been ranked among the top five most valuable listed companies in the U.S. stock market for 13 consecutive months. However, its total market value has now dropped to 10th place. Since the beginning of 2024, Tesla's stock price has fallen by about 20% due to weak demand for electric vehicles. In contrast, NVIDIA, whose stock price surged by 240% in 2023, has continued to rise, increasing by nearly 47% since the beginning of this year.

Reed, Director of Global Economics and Special Research at Deutsche Bank, added: "Therefore, on the edge of the seven tech giants, there is some fluctuation in the status of its members. You may question the valuation levels of individual components, but the core members of this group have been the largest and most successful listed companies in the U.S. and even the global stock market for many years."

Is the investment return in the U.S. stock market expected to expand from the Magnificent 7 to a broader range of U.S. targets?

Despite the gloomy global economic outlook since the beginning of 2023, the returns in the U.S. stock market have impressed global investors, especially with high returns mainly concentrated in the seven tech giants (Magnificent 7). They have benefited greatly from the global investment frenzy around artificial intelligence and expectations of Fed rate cuts.

Global investors have flocked to the seven tech giants from 2023 to early 2024, mainly because they have bet on these giants leveraging their massive market size and financial strength to expand revenue using AI technology. This group accounted for about two-thirds of the index's 23% surge in 2023.

In a research report last week, wealth management firm Evelyn Partners emphasized that the overall total return of the seven tech giants in 2023 reached an incredible 107%, far exceeding the MSCI U.S. index, which brought investors a return of about 27%, still healthy but insignificant compared to the seven tech giants.

Daniel Casali, Chief Investment Strategist at Evelyn Partners, stated that there are signs that investment opportunities in the U.S. stock market this year may expand beyond the seven tech giants. In the strategist's view, there are two main reasons for this, with the first being the resilience of the U.S. economy. "Despite the U.S. benchmark interest rates remaining near historic highs, U.S. companies' sales and profit performance have been very resilient."This may be attributed to companies being more disciplined in cost management, as well as most American households accumulating higher savings during the COVID-19 pandemic. Additionally, the favorable labor market conditions in the United States are expected to add nearly 3 million jobs in 2023, laying a solid foundation for consumption with robust wages."

"Despite strong wage growth, it has not kept pace with the rising prices in the United States, leading to a decrease in the proportion of labor costs in goods and services prices," added Casari.

The second major factor is the significant increase in profit margins of American companies. Strategist Casari stated that this indicates companies have skillfully raised prices while taking comprehensive measures to reduce costs and increase profits. During times of high inflation, they have passed on the impact of rising inflation to consumers.

However, Casari also pointed out that when the stock market is heavily weighted towards a few stocks and a specific investment theme, especially artificial intelligence, investors face the risk of missing investment opportunities.

In the past year, many of the other 493 components of the S&P 500 Index have underperformed in terms of stock prices and performance, but Casari suggested that if the above two factors continue to drive the economy, some of these components may gradually join the upward trend and outperform the seven major tech giants at some stage.

Dan Suzuki, Deputy Chief Investment Officer of Richard Bernstein Advisors, previously stated in a report that if the U.S. economy accelerates and achieves a soft landing successfully, the upward trend of U.S. stocks will expand beyond the seven major tech giants to other companies that can ensure profit growth. This may lead to a classic rotation market or profit recovery trend, shifting towards cheaper cyclical stocks. Investors will become more of a "comparative shopper" in a broad sense, commonly known as "comparing prices at three stores".

In 2024, the Magnificent 7 may continue to lead the entire U.S. stock market

"Given the outstanding performance of these stocks dominated by the artificial intelligence investment theme in 2023 and early this year, investors may be inclined to continue supporting them. Therefore, this year the seven major tech giants (Magnificent 7) may continue to lead the U.S. stock market." stated Casari, Chief Investment Strategist at Evelyn Partners.

Last Friday, the stock strategy team at Goldman Sachs on Wall Street raised Goldman Sachs' target for the U.S. stock market - the S&P 500 Index, as well as the overall returns of the S&P 500 Index for this year and the next two years. Goldman Sachs emphasized that this is largely due to the strong profit expectations of the seven major tech giants, which are highly likely to continue leading the U.S. stock market.

The strategy team led by Goldman Sachs strategist David Kostin now expects the S&P 500 Index to rise to 5200 points by the end of this year, which is about 2% higher than the 5100 points level predicted in mid-December. "Profit expectations, especially the upward revision of profit expectations for the seven major tech giants, are the main driving factors behind this adjustment," stated the Goldman Sachs strategy team led by Kostin.In the fourth quarter earnings season, the fundamental strength of the seven tech giants continues to shine. Over the past three months, profit expectations for the seven tech giants have been raised by about 7%, with a profit margin increase of 86 basis points. In contrast, profit expectations for the other 493 stocks have been lowered by 3%, with a profit margin decrease of 30 basis points. The seven tech giants account for 11% of the total sales of the S&P 500 index in 2023, and 18% of the total profits. We also expect the seven tech giants to increase their earnings per share by about 20% in 2024," said the Goldman Sachs strategy team.

Goldman Sachs also stated, "The earnings per share of other components of the S&P 500 index are also expected to increase in 2024, but the magnitude is expected to be much smaller compared to the seven tech giants." "We expect that the information technology and communication services sectors will be the strongest contributors to earnings per share growth among the components of the S&P 500 index in 2024. Five of the seven tech giants are in these two sectors."

"In addition, we also expect that demand-driven factors, including the trend of monetizing artificial intelligence and consumer strength, will support significant revenue growth in these two sectors. As these companies focus on operational efficiency, profit margins will continue to expand."

Looking at the Compound Annual Growth Rate (CAGR), from 2013 to 2019, the overall sales CAGR of the "seven tech giants" was as high as 15%, while the CAGR of other stocks was 2%. This gap narrowed in 2021 to 2022. However, Goldman Sachs strategists expect that from 2023 to 2025, the compound annual growth rate of total sales for the "seven tech giants" will reach 11%, while the CAGR of other components of the S&P 500 index will only be 3%.