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The Lopsided World of Stock Markets

3 Mins read

Stock markets can often feel like a seesaw, with a select few companies on one side and the rest of the market on the other. According to Richard Bernstein Advisors (RBA), this creates a unique opportunity for investors, except for those focused on the so-called Magnificent Seven companies.

The Magnificent Seven is composed of big tech firms like Apple (AAPL), Amazon.com (AMZN), Google parent Alphabet (GOOGL), Facebook parent Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA). These companies have had a significant impact on this year’s stock market rally. While the S&P 500 has delivered total returns of over 13% so far this year, removing the seven stocks leaves the index nearly flat.

RBA notes that most investors tend to lean towards the high side of the seesaw, favoring these seven stocks. However, RBA’s portfolios are intentionally positioned on the other side.

According to Richard Bernstein, CEO and Chief Investment Officer of RBA, people are drawn to these stocks simply because they are performing well, without any fundamental reasoning behind their choices. This presents a clear indication that there are opportunities beyond the Magnificent Seven.

While Bernstein admits that he doesn’t favor every stock outside of the Magnificent Seven, his preference lies elsewhere. He believes that narrow markets, dominated by only a few companies, may be economically justified during times of scarce growth. However, this justification falls short when considering that corporate profits are actually accelerating and the overall economy remains healthy.

RBA is dedicated to conducting in-depth research and has identified over 130 U.S. companies with earnings growth of 25% or higher. Surprisingly, only one of these companies belongs to the Magnificent Seven and ranks 111th on the list.

As a global macro-based investment firm managing over $15 billion, RBA primarily invests in exchange-traded funds (ETFs). Their ETF strategies are available on various broker-dealer platforms and not directly sold to retail investors.

In conclusion, RBA suggests that investors explore opportunities beyond the Magnificent Seven to maximize potential returns in a market that doesn’t solely rely on a select group of tech giants.

According to a recent report, the so-called “Magnificent Seven” stocks may not be as magnificent as they seem. In fact, their excessive valuations suggest that there could be better investment opportunities elsewhere.

The average price-to-earnings ratio of these seven stocks is a staggering 41, compared to the more reasonable P/E ratio of 15 for the equal-weighted S&P 500 index. This significant difference in valuation raises concerns about the sustainability of their performance.

Numerous studies have shown that long-term returns are closely tied to valuation. It’s like paying Bentley prices for Volkswagens; it’s simply not a wise financial decision. With the Magnificent Seven trading at such extreme valuations, it’s worth exploring alternative investment options.

Not only are these tech giants expensive relative to smaller cap stocks, but they also appear overpriced when compared to the rest of the world and emerging markets. In fact, almost anything else seems like a cheaper investment opportunity. This imbalance raises the possibility of a lost decade in equities, as these seven stocks dominate a significant proportion of the index.

With this in mind, a leading firm recommends looking beyond the Magnificent Seven and diversifying investments. One such strategy is the Global Risk-Balanced Moderate ETF Strategy, valued at a substantial $7.1 billion. This unique approach combines the MSCI ACWI Index with non-tech cyclical stocks to achieve balance and mitigate risk.

The rationale behind overweighting non-tech cyclical stocks is rooted in the profit cycle. As Bernstein, an expert in the field, explains, stable growth is too predictable. Instead, having exposure to cyclical industries becomes crucial. During a slowdown in the profit cycle, it is advisable to avoid cyclical exposure. However, when the cycle heats up, adding cyclical investments can yield favorable results.

Looking globally, there are several regions that offer compelling opportunities. Among the preferred options are Canada, China, Europe, and Japan. These areas exhibit signs of profitability starting to rev up, making them potential hotspots for investment. When assets are inexpensive, and there is widespread disinterest, the potential for greater profitability can make for an enticing story.

In conclusion, it may be time to reconsider the Magnificent Seven and explore alternative investment paths. The excessive valuations and dominance of these stocks in the market raise concerns about their sustainability. By diversifying investments and considering options beyond these tech giants, investors can potentially find more lucrative opportunities in various regions across the globe.


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