The diverging fortunes of the magnificent seven has been a notable feature of US markets this year.
At one end, Tesla has seen its share price slump as revenues have failed to live up to the lofty expectations set by markets. On the other, Nvidia has continued its astonishing run, defying even the most optimistic analysts.
Tesla’s fortunes are a sign that investors are not totally indiscriminate in their pursuit of large-cap technology. If anything, those companies where high expectations are embedded are likely to fall further when they disappoint.
Tesla’s share price is down 29.3 per cent year to date, underperforming the S&P 500, which is up 9.9 per cent over the same period.
There are only really two stocks that have proved true to the ‘magnificent’ tag this year: Meta, which is up 42.8 per cent and, in particular, Nvidia, which is up 82.5 per cent. It is these two, above all, that appear to be seeing tangible results from the artificial intelligence revolution.
The remaining four – Amazon, Apple, Alphabet and Microsoft – have all performed approximately in line with the index.
Broadening horizons
This may be the start of a change in the landscape for US investors.
US stock markets have not rewarded creativity from investors over the past few years. They could simply invest in an index fund and rely on big-cap technology to do the hard work for them.
But it is one thing relying on seven companies, and quite another to rely on just two. Might this galvanise investors in US markets to look deeper and explore the ‘forgotten 493’ and beyond?
One sign that investors might be broadening their horizons would be the relative performance of the S&P 500 equal-weighted index and the ‘normal’ S&P 500 index.
The normal index, which has a far greater weight in the mega-cap technology companies, has outpaced the equal-weighted index comprehensively over the past five years, delivering an annualised return of 13.9 per cent versus just 10.8 per cent.
However, here, the balance has not yet started to shift. The equal-weighted index is up 5.9 per cent for the year, a little more than half the level of the main index.
However, there are more optimistic signs in the mid and small-caps segment. Smaller and medium-sized companies moved ahead of their large-cap peers during the recent rally – the MSCI USA Small Cap index was up 13.3 per cent in the three months to the end of February, compared with 12 per cent for the MSCI USA index.
That outperformance has continued even as markets have wobbled more recently.
This supports the view that the mega-caps had become a defensive option for many investors. In a world of little growth, investors had gravitated to sources of predictable and proven growth, of which the mega-caps were the most high-profile option.
