The Magnificent 7

The current level of concentration of tech giants in US markets is unprecedented. Could this be a bubble in the making?

- AKASH PRAKASH

The Magnificent Seven is the new acronym everyone is talking about in global equity markets. They are the seven largest companies by market capitalisation in the US (Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta, Tesla) and have been on a tear over the past few years. These companies have seemingly been the driving force behind the markets, and their earnings, most recently Nvidia's, drive market sentiment. Rarely have so few stocks been so important for global equities.

If we look at relative performance, the reason for the hype is obvious. Over the last nine years, the Mag Seven stocks have surged more than 18 times, compared to less than three times for the S&P 500. As these seven stocks have gained greater prominence, the US stock market has become increasingly concentrated. Today, the top decile of stocks in the US account for more than 75 per cent of total market capitalisation. The only other time we have seen this level of concentration was at the bubble peaks of 2000 and 1929. Worryingly, in both the prior periods, this ratio eventually mean reverted to 60 per cent. Since 1926, the median ratio of concentration for the US has been 63 per cent.

If we look at the top five stocks, at 25 per cent of the S&P 500, this ratio is back to the peak of the Nifty 50 era of the late 1960s. Even the top 10 stocks, constituting 34 per cent of the S&P 500, have never been a bigger part of the market than today. Driven by the Mag Seven, concentration, whichever way you cut it, has never been higher.