Hedge funds can’t get enough of the so-called magnificent seven stocks that have dominated this year’s stock market, but other investors are becoming more cautious.
According to Goldman Sachs, hedge funds hold record exposure to the aforementioned grouping: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta. While the seven stocks have been responsible for roughly three-quarters of the S&P 500′s 2023 gains, things have lately got trickier, with the grouping underperforming the S&P 500.
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That’s not unexpected in a market pullback – often, big winners give up ground in corrective periods, only to soon resume their leading role. However, might a longer breather be overdue? The mega-cap divergence in the first five months of 2023 was one of the most extreme on record, with the top 10 stocks returning 32 per cent even as the remaining 490 stocks in the S&P 500 went nowhere.
Ned Davis Research’s Ed Clissold recently noted that even after the recent pullback, the eight biggest tech stocks (add Netflix to the aforementioned list) accounted for 28 per cent of the S&P 500 but just 18 per cent of index earnings.
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Elevated valuations mean strong earnings growth is needed to power the tech rally, says Clissold. This was evidenced in earnings season, when most mega-caps saw their stock prices fall even after beating expectations.
Hedge funds think the tech giants can resume their leadership role, but heady valuations mean others are looking beyond the magnificent seven for opportunities.
