European stock markets reach new heights with the help of 11 GRANOLAS companies, reminiscent of the Magnificent Seven.

• In 2020, Goldman Sachs identified Europe's largest market caps as "internationally exposed quality growth compounders," which the bank dubbed the GRANOLAS.
• This group, consisting of GSK, Roche, ASML, Nestle, Novartis, Novo Nordisk, L'Oreal, LVMH, AstraZeneca, SAP, and Sanofi, has been compared to the Magnificent Seven U.S. tech giants due to its momentum.

In the past year, only 11 stocks contributed to half of the growth that led the European stock market to a new record high on Friday.

This month, highlighted that Europe's stock markets were dominated by a group of "internationally exposed quality growth compounders" with the continent's largest market caps, which the bank referred to as the GRANOLAS in 2020.

This group, consisting of , , , Nestle, Novartis, Novo Nordisk, , AstraZeneca, SAP, has been compared to the "Magnificent Seven" U.S. tech giants and has raised similar concerns about concentration risks in European equity markets.

The GRANOLAS account for approximately a quarter of the total Stoxx 600 market cap, and Goldman analysts noted in a recent report that they possess characteristics that are expected to perform well in the current cycle, including robust earnings growth, high and stable margins, and strong balance sheets.

The Wall Street bank's analysts proposed that the structural shift towards passive investment and the lack of liquidity in the European equity market may also benefit them.

The GRANOLAS have surpassed the Magnificent 7 in performance over the past two years, and their risk-adjusted performance is even more impressive, with a 2x lower volatility. This translates to a higher Sharpe ratio.

While the GRANOLAS have a high price-to-earnings ratio, which can indicate that they are overvalued, this is typical for growth companies. In contrast, the Magnificent Seven trades at a significant discount compared to the GRANOLAS.

Goldman Sachs anticipates the strong growth momentum to persist, with a projected 7% revenue compound annual growth rate for the GRANOLAS through 2025, compared to 2% for the broader market excluding the group. Additionally, the 11 stocks offer dividend yields to shareholders in the range of 2-2.5%.

Goldman Sachs believes that the majority of revenue growth for the STOXX 600 in Europe will come from the GRANOLAS, and this trend will be sustained by high barriers to entry businesses, strong balance sheets, and high levels of investment in R&D and growth CAPEX, similar to the Magnificent 7.

The concentration of stock market gains among the GRANOLAS raises concerns about concentration risk, but some analysts believe that the diverse sectors represented in the group may provide some protection.

According to Tim Hayes, chief investment strategist at Ned Davis Research, CNBC on Monday advised market participants to compare the current market situation to the end of 2020, when the market was heavily focused on a limited number of large-cap stocks.

Hayes stated that in 2021, the market broadened out, resulting in a very good year with low volatility. In anticipation of a globally synchronized economic expansion and earnings growth across sectors, the market also broadened out.

This suggestion led to complacency in the market, causing investor confidence to persist despite the underlying divergences.

The narrow market at the end of 2021 was caused by the increasing divergence of sectors as supply chain and inflationary pressures became apparent, leading to rising commodity prices, which ultimately contributed to the 2022 bear market, according to Hayes.

He proposed that the longer the current complacency persists, the more susceptible the market is to adverse developments, whether they are negative or positive, and the greater the likelihood that the market will be caught off guard by news that had previously been anticipated but failed to materialize.

Hayes stated that the market had anticipated numerous rate cuts, but when it was discovered that the number of cuts might be lower than expected, it caused a slight pullback.

If the market becomes complacent, it can lead to a bigger scale negative surprise.