Are the ‘magnificent seven’ seriously over-extended?

Are the 'magnificent seven' of US tech stocks riding into trouble?

An ‘emperor’s new clothes’ scenario could be applied to US tech stocks, which have been highlighted before in this column and we still feel could be living in an unreality bubble.

There was a very interesting article by Peter Atwater, an adjunct lecturer in economics at the College of William and Mary, Virginia, in the Financial Times, entitled We should examine why investors are betting on the sure things.

No doubt people will accuse us of prejudicial endorsement bias, but why aren’t we jumping after the US tech of Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta Platforms?

Jennifer Hughes in the FT of August 26 expands upon this by reminding us of recent history that these seven were responsible for ‘88% of the gains in the market’ and representing ‘three-quarters of the S&P500’s gains’.

What is frightening though is that investors do not understand this, nor the prospective risks their simple ‘cheap’ global tracker funds holding US tech may present to them based on this dominance.

In the preceding four weeks to the date of her article, these stocks had actually lost $700billion of market value instead.

Optimistically, she notes that even a pause in their ascent would not be a bad thing to avoid a significant retrenchment later instead.

However, most of these gains in their share prices have not been on results these businesses have actually achieved but greater speculative optimism in what their future results will generate. That seems a shaky foundation upon which to invest, relying on feelings and instinct rather than hard facts.

This is reflected by ever more optimistic ‘price to earnings ratios’ which make the whole of the US look precarious (and the UK, say, ludicrously cheap in comparison).

The simple answer is that in our view, these seven, worth a theoretical $11trillion based on present market values, are far too dear and conversely, there are so many seriously undervalued assets out there instead which could give phenomenal results for investors.

These often-overlooked assets also much better protected against a market rout (as they have far less distance to fall) so it makes the choice ‘easier’ even if it seems to be a controversial decision to avoid or limit the exposure to what ‘everyone else’ has been chasing.

Mr Atwater doesn’t decry these companies but he does note that ‘with lower confidence comes a more impulsive and emotional reaction to threats’. So, be wary. These seven are seriously over-extended.

As ever, if you are thinking of investing, or worried about underperforming assets, please don’t make any hasty decisions.

Speak to your financial adviser or engage the services of an independent financial adviser (IFA) to ensure you are properly informed and not making knee-jerk reactions to short term events, which could cost you more in the long run.