If you’re an investor who has notched magnificent returns from the Magnificent 7, it might be time to ask: Is it time to get out? The answer is yes according to Rob Arnott. Arnott is the founder and chairman of Research Affiliates, a firm that oversees strategies for nearly $200 billion index funds and ETFs for the likes of Charles Schwab and Invesco. Overall, his predictions for the markets are grim: He warns that shareholders in U.S. big caps will make one-fifth the returns over the next 10 years they pocketed since 2016, and those meager gains will barely edge the CPI.
But U.S. big tech investors are a in for a special world of hurt, he predicts. When he digs into the difference in prospects between the S&P value and growth contingents, a big gulf emerges. The RA model predicts 4% annual gains in the former and a shockingly puny 1.4% in the latter, meaning the recent champs’s returns will lag inflation by one-percent. Much of the drag, he says, arises from the big valuations, on top of earnings so gigantic they’ll be hard to grow big from here. A major reason we saw that double-digit EPS boom rampage, he avows, “is the stupendous growth in the Mag 7.” Now, he adds, “Valuations for growth stocks are very stretched, driven by the Mag 7. The market’s saying it’s a foregone conclusion they’ll grow earnings like crazy. But to beat the market, they’d need to grow earnings even faster than those lofty expectations.”
