S&P 493 vs S&P 500 - Developments driven by the ‘big 7’

The M&G Treasury and Investment Office thoughts on the recent performance comparisons of the S&P 493 vs the S&P 500 with the stellar performance seen this year in what has become known as the ‘big 7’. Views should not be taken as a recommendation or advice.

The big 7 made up of Nvidia, Meta Platforms (Facebook), Tesla, Amazon, Apple, Microsoft and Alphabet (Google) are the dominant seven stocks shaping the market landscape in 2023. These S&P heavyweights have a combined market capitalisation of $10.6 trillion compared to the $27 trillion of the other 493 stocks*.

If we look at the past 10 years of performance between the two indices, we’ve seen a stark uplift in performance since the Covid-19 pandemic with another this year. The seven names have provided nearly 2000 index points over the past four years.

Past performance is not a guide to future performance.

Source: Multi-Asset Portfolio Management Team, M&G Treasury & Investment Office, as at July 2023

So what factors are driving the big 7?

Federal Reserve Policy Tightening

With market expectations that US interest rate hikes will eventually end, stocks such as the big 7 with higher valuations stand to benefit due to the favourable environment for these companies. Markets appear to be discounting the lagged impact of monetary policy, with gravitation to AI-centric companies pushing interest rate-sensitive equities higher, particularly technology businesses with an eye on the future.

Amplified influence in Exchange Traded Funds (ETFs)

All seven stocks receive a disproportionate share of ETF inflows compared to the broader market due to the fact they are heavily weighted in major capitalisation-based indices.

Artificial Intelligence (AI) revolution

With 2023 the best start to the year for technology stocks in 25 years, the adoption of AI has helped fuel the growth of these prominent tech stocks that are seen as frontrunners of the technological revolution.

The big 7 returns year to date

Performance (shown below) shows returns for most in excess of over 50%, compared to an overall increase for the S&P 500 of 17.55%.

Source: Refinitiv data stream & MAPM (M&G Investment Office) 2.8.23

What does this mean for valuations?

As AI goes ‘mainstream’ and the technology gets more broadly adopted, levels of competition often shift from ease of use to cost and economics. Nvidia’s 80% gross margin on graphic processing units (GPUs) leaves a very wide pricing umbrella for competition. Other members of the ‘big 7’ such as Microsoft, Meta and Amazon are already working together to make custom chips and Google already uses its own custom processors in many workloads.

While we believe current valuations are fair and these names are likely to remain a determinant of US equity market trends, valuations are based on elevated growth expectations and may not be a good guide to future returns in this space. A change in investor sentiment might drive these stocks lower for no apparent reason and are mindful of concentration risk.

For some of our portfolios that have more significant US tech exposure, our underlying managers have now switched out of names that have rallied more aggressively and added to names that we believe still offer upside value. For instance, we have sold out of Nvidia following strong performance, benefitted from Samsung positioning in Q2 (a perceived AI winner) and AI-linked semiconductors in Japan that have performed well within the companies we invest in. Managers are generally looking to identify beneficiaries of AI, those companies who see it as an opportunity, rather than viewing it as a threat.

In summary

Our range of Multi-Asset Funds are globally diversified across Equities, Fixed Income and Real Assets. Within Equities, we maintain a similar weight to peers but with higher diversification. We continue to monitor the potential upside and downside risk associated with each of the ‘big 7’ companies, all of which sit within our PruFund Growth and PruFund Cautious Funds, 1.44% for PruFund Growth and 0.78% for PruFund Cautious as at end July 2023.

Asset allocations are regularly reviewed and may vary from time to time, but will always be consistent with the funds objective.

The value of your clients’ investment can go down as well as up. Past performance is not a reliable indicator of future performance.

*Source Markets Insider 9.6.23

Information provided has been obtained from sources that M&G Treasury and Investment Office (T&IO) believes to be reliable and accurate at the time of issue but no representation or warranty is made as to its fairness, accuracy, or completeness. The views expressed herein are subject to change without notice. No person should rely on the content or act on the basis of any matter contained in this document without obtaining specific professional advice. Neither T&IO, nor any of its associates, nor any director, or employee accepts any liability for any loss arising directly or indirectly from any use of this article. Reference to the names of each asset class/company mentioned in this communication is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies.