This year, the performance of the S&P 500 has been heavily dependent on a group of stocks known as the “Magnificent Seven.”
These are the seven giant tech stocks that have accounted for nearly all the S&P 500’s gains this year.
You know the names.
The group is composed of Apple (Nasdaq: AAPL), Amazon (Nasdaq: AMZN), Alphabet (Nasdaq: GOOGL), Meta Platforms (Nasdaq: META), Microsoft (Nasdaq: MSFT), Nvidia (Nasdaq: NVDA) and Tesla (Nasdaq: TSLA).
Just look at how these massive stocks have performed in 2023…
The worst-performing stock of the bunch is up 40%!
After a big year like this, you won’t be surprised to learn that the stocks in the Magnificent Seven are not cheap.
The average price-to-earnings ratio of these seven stocks is a gaudy 41.
That is rich… but it’s no surprise.
These stocks have carried the S&P 500 to a 14% increase so far in 2023.
However, if you remove the performance of the Magnificent Seven, the S&P 500 would be roughly flat for the year.
These big stocks have heavy weightings in the index, and as a result, their performance has a significant impact on it.
You can see the extent of their influence in the chart below, which compares the equal-weighted S&P 500 index (in which every stock counts the same) with the regular, market cap-weighted S&P 500.
Again, the S&P 500 is up 14% in 2023… but the equal-weighted version of the index is hardly up at all.
While the strong performance of the Magnificent Seven has made those stocks (and the market cap-weighted S&P 500) expensive, the underperformance of the rest of the market has made many other stocks cheap.
As evidence of that, I present the two charts below, which show that both the S&P MidCap 400 Index and the S&P SmallCap 600 Index are cheap on a forward price-to-earnings basis.
Both indexes are very inexpensive relative to where they’ve traded this century.
Trading at 12.2 and 11.4 times forward earnings, respectively, both midcap and small cap stocks look very appealing compared with the rest of the market.
The biggest stocks, on the other hand, are not where we want to be putting our money today.
With all of this in mind, The Value Meter is going to weigh in on a few different assets this week:
- The Magnificent Seven, which are trading at an average of 41 times earnings, are on the verge of being “Extremely Overvalued.” (Perhaps they’re even “Magnificently Overvalued”!)
- The SPDR S&P 500 ETF Trust (NYSE: SPY), which tracks the S&P 500 and is dominated by the Magnificent Seven, is at least “Slightly Overvalued.”
- The Invesco S&P 500 Equal Weight ETF (NYSE: RSP), which tracks the equal-weighted S&P 500 index and is not dominated by the Magnificent Seven, is “Slightly Undervalued.”
- Both the SPDR Portfolio S&P 400 Mid Cap ETF (NYSE: SPMD) and the SPDR Portfolio S&P 600 Small Cap ETF (NYSE: SPSM), which track the two indexes shown in the chart above, are on the verge of being “Extremely Undervalued.”
— Jody Chudley
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Source: Wealthy Retirement