In the old days, there were the FAANGs, the five big US tech stocks that dominated the investment landscape – Facebook (now Meta), Amazon, Apple, Netflix and Google (now Alphabet). That picture is now out of date. Say hello instead to what is variously called the Super Seven or the Magnificent Seven – four of the above (the dropout being Netflix) plus Microsoft, Tesla and the chip-maker Nvidia. This group’s domination is the stock market story of 2023.
The chart below is “one for the ages”, says Duncan Lamont, the head of strategic research at the fund manager Schroders. It shows how, even if you invest via one of the broadest and most widely used “global” stock market indices, you will end up with a portfolio that is very American and very skewed towards US tech.
The index is the MSCI All Country World Index (ACWI), which covers approximately 85% of “the global investable equity opportunity”, as the compilers put it, by measuring almost 3,000 large and mid-sized companies in 23 developed markets and 24 emerging ones. The bigger a company becomes in value, the greater its weighting in the index.
The seven are now so big that they account for 17.2% of the whole thing, while the combined representatives of Japan, the UK, China, France and Canada contribute 17.3%. Seven US companies equals five countries. “This is far from diversified exposure,” says Lamont. Apple alone, with a market value of $3tn, is bigger than the entire UK stock market.
The numbers have become so astonishing, in part, because of what is shown in the second chart. Up to last week, the group of seven has risen in value by 74% in 2023. The rest of the world’s equities, within the same ACWI index, have managed 12%. If your portfolio did not include the Magnificent Seven in 2023, it was hard to keep up.
Is this degree of concentration healthy? It’s certainly unprecedented. Thanks to the whoosh from the seven during 2023, US stocks now account for 63% of the supposedly global ACWI. Even in the go-go days of the Japanese economic miracle, the country accounted for only 44% of the same index. “The US has far exceeded the level of concentration of Japan in the 1980s, which everyone thought was extreme at the time,” says Lamont.
Yet it would be hard to argue that the rise of the seven has been fuelled by the type of wild speculation that created the turn-of-the-century dotcom bubble. The 240% rise in Nvidia’s stock price this year may or may not be overdone, but it’s undeniable that the company’s order book for computer chips is booming as the artificial intelligence (AI) revolution arrives.
It would also be wrong to think of the seven as entirely alike. All have leading positions in growing markets and Amazon, Google and Microsoft have big cloud services divisions. But Amazon’s retail division has little in common with Google’s search business and Microsoft’s core software business is different again. All may benefit from AI, which helps to explain the stock market’s renewed love affair with technology in 2023 after a heavy “down” year in 2022, but the degrees will differ. Tesla remains, primarily, a maker of electric vehicles.
Instead, it’s probably more sensible just to think through the implications of such extreme market concentration. In a broadly exposed investment portfolio a lot of risk – in both directions – is driven by just seven stocks.
Lamont makes a couple of points. First, the statistically correct observation that the US stock market is now priced at nose-bleed levels, historically speaking, isn’t telling the full story. Rather, it’s reflecting the influence of the seven. “US exceptionalism is not all stocks,” he says. “It is a small number crushing everything in the path.” The average US stock is not expensive by traditional investment yardsticks.
Second, there is scope for disappointment when stocks are priced for perfection. The Schroders research found that periods of high concentration in markets have tended to be followed by periods of poorer performance by the bigger stocks. “This time may be different, and we are in uncharted territory to an extent,” concedes Lamont.
You could say it suits Schroders, as an active management house, to suggest the pendulum is about to swing away from passive index-followers. But the basic point feels intuitively correct: the current concentration is extraordinary, out of whack with historical norms and the relative lack of diversification is possibly underappreciated by investors. Timing is always a mug’s game – but a reversal looks the way to bet.
