Excitement around artificial intelligence and a resilient US economy has driven tech stocks ever-higher this year. So much so that the so-called 'Magnificent Seven', which includes Alphabet (US:GOOGL), Amazon (US:AMZN), Apple (US:AAPL), Meta Platforms (US:META), Microsoft (US:MSFT), Nvidia (US:NVDA) and Tesla (US:TSLA), now make up almost a third of the S&P 500 by value, up from a tenth a decade ago.
This offers an opportunity to find bargains in the smaller stocks that look increasingly cheap and that could also insulate investors from a turnaround in Magnificent Seven fortunes. “These lofty valuations may not be sustainable, as a potentially moderating economy and rapid monetary tightening leave corporate profits increasingly vulnerable,” said Dan Skelly at Morgan Stanley.
The Magnificent Seven are currently trading at an average price/earnings (PE) ratio of 41. This is well ahead of the wider S&P 500, which is trading on 18 times its forward earnings, down from 20 times in the middle of the summer. On an equal weighted basis, the S&P 500’s PE ratio is around 15.