The bull market is still going strong even though the Magnificent Seven have faltered

James Mackreides claims that even though the Magnificent Seven tech stocks have faltered, the most fascinating years of this bull run are still ahead of us

There is a widespread perception that the US stock market's unrelenting rise is due to the "Magnificent Seven" tech stocks. Nvidia, Amazon, Alphabet, Microsoft, Apple, Meta, and Tesla are seven of the biggest companies in the United States and, consequently, the world. They are sometimes referred to as the Magnificent Seven, or the Mag 7.

However, the Magnificent Seven no longer ride together, and this year's performances are significantly different. The S&P 500 has made 13.4% so far this year. Tesla has made a 25% return, while Amazon has made a 21% return. Nvidia (19%) is in the middle, followed by Apple (16%), Alphabet (12%), Microsoft (6%), and Meta (0.4%). As a result, TSMC, Broadcom, SpaceX, and Saudi Aramco have pushed Meta and Tesla down to sixth, seventh, eighth, and ninth place, respectively, on the list of the biggest companies in the world.

This year, the values of fifteen S&P 500 companies have more than doubled, with Sandisk (+413 percent), Dell (+255 percent), and Micron (+207 percent) leading the way. Tesla is near the bottom and none of the Magnificent Seven are in the top 150. The Magnificent Seven are up just 4.8 percent this year compared to 16 percent for the remaining "impressive 493," according to strategist Ed Yardeni. The Magnificent Seven no longer hold the top spot in information technology, which is still the S&P's second-best-performing sector (up 23.6 percent compared to +28.4 percent for energy).

The Magnificent Seven have made significant AI investments.

Investors' concerns about the enormous sums of money these companies are investing in AI could be the reason for the lackluster performance. These businesses employ and are run by some of the world's brightest individuals, despite the fact that this may appear to be collective insanity. In any event, any decline in investment and consequently an increase in cash flow could result in renewed outperformance. How likely is it that they are mistaken and the traveling pundits, with their scant knowledge and experience, are correct?

According to Yardeni, the S&P 500 Growth index's forward multiple of earnings has dropped to 20.2 compared to the Value index's 18.3. He claims that Growth traded on a multiple above 40 in 2000. The multiple of sustainable forward earnings is higher because growth's forward earnings have been boosted by mark-to-market capital gains; however, he notes that "bull markets do not die of old age or of accumulated gains." When earnings roll over, they typically pass away."

Then, instead of "FOMO," or the fear of missing out, as was the case in the late 1990s, the bull market is propelled by "FEMO" fantastic earnings momentum. Since the start of the current bull market in October 2022, the S&P 500 has increased by 117%. Out of the eight bull markets since 1969, that is ranked fifth. Longer term, the index increased by 277 percent since 2015, but it increased by 625 percent between 1985 and the year 2000. "The interesting years are ahead rather than behind if the analogy holds true and the market continues to rise."

How are other markets doing?

Additionally, Yardeni tracks sentiment, which indicates that "retail investors not so much" but institutional investors are bullish (a contrary indicator). A setback or a period of sideways trading would likely dampen sentiment and open the door for a further advance because markets do not rise in a straight line. It is unlikely that earnings growth will suffer a significant setback; if the Gulf War and its impact on oil prices couldn't do that, what could?

The prospects are at least as favorable elsewhere. The UK market has been severely undervalued as a result of the consistently pessimistic and risk-averse British, and the takeover bonanza for foreign and private equity bidders is still going strong. The yen's 15-year bear market is finally beginning to stabilize, if not reverse. As a result, foreign investors would perceive the robust underlying performance of the Japanese market even more favorably.

Due to the successful globalization of its businesses, the outlook for the European economy is improving. Despite recent setbacks, South Korea (+71 percent) and Taiwan (+62 percent) lead the country performance table because technology companies in emerging markets are performing even better than those in the US, with a year-to-date performance of 32 percent. The MSCI All Countries World index ex US has had mediocre earnings growth over the past three years, but it is about to pick up speed, with 34% growth anticipated over the next 12 months.

The better performance of smaller businesses provides more proof that the market is expanding; over the past year, the US Russell 2000 index has surpassed the S&P 500 and reached record highs. Though performance has improved and may be improving, small caps in the UK, Europe, and Japan have continued to perform poorly.

The bull market is not over yet.

It appears that the Magnificent Seven's recent outperformance was a fleeting trend. Its conclusion does not indicate the end of the bull market, much less an impending collapse, but rather a sound return to the conventional pattern in which mega-caps lag behind a market that is generally rising.