Is it concerning that the profits of the Magnificent 7 have surpassed almost every country worldwide?

• The "Magnificent 7" U.S. tech giants include Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla.
• The Magnificent 7's combined market cap would make it the second-largest country stock exchange in the world, according to Deutsche Bank analysts in a research note on Tuesday.
• Some analysts have raised concerns about related risks in the U.S. and global stock markets due to the level of concentration.

According to new Deutsche Bank research, the "Magnificent 7" now has more financial power than almost every other major country in the world.

The seven largest US tech companies, namely Apple, Microsoft, Amazon, Facebook, Alphabet, Netflix, and Tesla, have experienced a rapid increase in profits and market capitalizations, surpassing those of all listed companies in almost every G20 country, except for China and Japan, according to a research note by the bank on Tuesday.

Deutsche Bank analysts pointed out that the combined market cap of the Magnificent 7 would make it the second-largest country stock exchange in the world, surpassing Japan's market cap by double. Microsoft and Apple, individually, have market caps similar to the combined market caps of all listed companies in each of France, Saudi Arabia, and the U.K, according to the analysts.

Some analysts have raised concerns about related risks in the U.S. and global stock market due to the level of concentration.

Last week, Deutsche Bank's head of global economics and thematic research, Jim Reid, warned in a follow-up note that the U.S. stock market is currently experiencing its highest level of concentration since 2000 and 1929.

Since the mid-1960s, the top five most valuable companies in the S&P 500 have been analyzed by Deutsche in terms of their trajectories.

Despite the tendency of big companies to eventually fall out of the top five as investment trends and profit outlooks change, 20 of the 36 that have occupied that upper bracket remain in the top 50 today.

Since 1997, Microsoft has been a part of the top 5 Mag 7, except for 4 months. Apple has been present since December 2009, Alphabet since August 2012, and Amazon since January 2017. The newest entrant to the top 5 Mag 7 is Nvidia, which has been there since H1 last year.

In 2021/22, Tesla was among the top five most valuable companies for 13 months, but has since dropped to 10th place, with its share price falling by approximately 20% since the beginning of 2024. In contrast, Nvidia's stock has experienced a significant increase of almost 47% since the start of the year.

Reid stated that while the outer edges of the Mag 7 have some volatility in their member positions and their overall valuations can be questioned, the core of the group, comprising the largest and most successful companies in the US and globally for many years, remains strong.

Could the gains broaden out?

Although the global economy was expected to be muted at the beginning of 2023, the stock market on Wall Street experienced impressive returns, with the Magnificent Seven benefiting from the hype surrounding AI and rate cut expectations.

Last week, Evelyn Partners, a wealth manager, noted in a research note that the Magnificent 7 index had an exceptional return of 107% in 2023, surpassing the broader MSCI USA index's 27% return, which was still healthy but relatively modest.

Evelyn Partners' chief investment strategist, Daniel Casali, stated that there are indications that U.S. stock opportunities may expand beyond the 7 megacaps in 2021 due to two reasons: the strength of the U.S. economy and other factors.

Although interest rates have increased, sales and earnings of the company have remained stable. This can be attributed to businesses being more cautious in managing their expenses and households having accumulated higher savings due to the pandemic. Furthermore, the U.S. job market is robust, with approximately three million jobs added in 2023, as stated by Casali.

Casali stated that the second factor is increasing margins, which suggests that companies have effectively raised prices and transferred the impact of inflation onto customers.

Casali stated that despite an increase in wages, they have not matched the rate of inflation, resulting in a decrease in the cost of labor as a proportion of the cost of goods and services.

The growth in profit margins and earnings is due to factors such as China joining the World Trade Organisation and technological advances, which have increased the supply of labor and access to overseas job markets. This trend is expected to continue.

There is a risk of missed investment opportunities when the market is heavily weighted towards a small number of stocks and a specific theme, such as AI, Casali stated.

Although many of the 493 other S&P 500 stocks have struggled over the past year, he suggested that some could start to participate in the rally if the two aforementioned factors continue to fuel the economy.

"Investors may be tempted to continue supporting AI-led stocks due to their impressive performance in 2023 and the current year," he stated.

If the rally expands, investors may miss out on other profitable investments beyond the Magnificent Seven stocks.