The Magnificent 7 Are Beginning to Look Average
The profit outlook for the group is converging with the rest of the S&P 500, but their valuations are not.
How high is too high?
Photographer: Yuki Iwamura/Bloomberg
Growth prospects for the group of companies dubbed the Magnificent 7 are still above average, but they’re no longer magnificent. Consensus Wall Street forecasts suggest that, in aggregate, the seven large-capitalization companies will perform just a whisker better than the “S&P 493” next year, and yet investors continue to pay a premium to own them. That alone suggests it may be time to dial back their weightings in portfolios.
Consider that the group’s net income growth is expected to ping pong around 20% from here on out, according to projections compiled by Bloomberg Intelligence. The other members of the S&P 500 Index are expected to see growth climb toward 16% by the end of next year. The issue is that the Mag 7 grouping trades at a median valuation of about 30 times blended forward earnings, while the other large-cap stocks in the S&P 500 Index trade at a median of 19.5 times. How long should we expect investors to overpay for increasingly similar performance?